Indian IT firms, major players in the tech industry, are gearing up for what’s known as a “washout” year. In simpler terms, they expect a tough year ahead with significant challenges in revenue and growth. Several factors are contributing to this gloomy outlook, and analysts from J.P. Morgan are closely watching the situation.
What is a “Washout” Year for IT Firms?
A washout year in Indian IT firms is when the IT sector experiences a significant decline in revenue, growth, and profitability due to weak demand, lower spending, delayed or canceled contracts, and increased competition. A washout year can negatively impact the IT firms’ performance, valuation, and outlook.
J.P. Morgan’s Assessment
According to some analysts at J.P. Morgan, the fiscal year 2024 (April 2023 to March 2024) is expected to be a washout year for Indian IT firms. They have not seen a meaningful increase in demand during their recent checks. The analysts believe the overall outlook is not as positive as in the previous quarter when the IT sector outperformed the broader market. Investors, in response, have shifted their focus to fiscal 2025, hoping to witness a rebound in deal signings and growth.
Challenges for Indian IT Firms
Indian IT firms are facing a perfect storm of challenges. Several key players in the industry, including Infosys, TCS, Wipro, and HCLTech, are bracing themselves for a tough year. These companies have previously cautioned that their U.S.-based clients have been cutting back on IT spending. This is mainly due to concerns about an economic slowdown and the uncertainty stemming from the ongoing COVID-19 pandemic. Furthermore, they’re grappling with increased competition from global players like Accenture, IBM, and Cognizant.
J.P. Morgan’s Expectations
J.P. Morgan analysts closely watch the upcoming second-quarter results and commentary from Indian IT companies. They are looking for signs of recovery in deal signings, particularly in preparation for fiscal 2025 after what they anticipate will be a washout year. Despite the caution, they are not optimistic about a significant uptick in demand based on their recent assessments. This negative outlook sets the stage for a challenging year.
Investor Shift Towards 2025
In response to the anticipated challenges in fiscal year 2024, investors have shifted their focus to fiscal 2025. This shift in focus is driven by hopes of witnessing a rebound in deal signings and overall growth. The Nifty IT index, which tracks the performance of IT companies, has outperformed the broader Nifty 50 index in the past three months, underlining this change in investor sentiment.
What to Watch in Upcoming Earnings Reports
As the next quarter’s earnings reports approach, deal signings will be spotlighted. Investors will closely scrutinize whether companies sign or renew existing deals. This data will provide critical insights into the sector’s potential growth in fiscal 2025. High hopes are pinned on increased new deals, indicating a brighter future for the IT industry.
Industry Executives’ Views
Despite hints of green shoots (positive signs) in certain areas, the analysts note that their recent meetings with various industry executives did not reveal any significant optimism for a demand rebound. Decision-making processes and deal ramp-up pace remain sluggish, which is a concern as a quick recovery in demand is essential for sector growth.
Earnings Growth Expectations
J.P. Morgan’s analysts foresee a high single-digit earnings growth for large-cap IT companies in fiscal 2025 in terms of percentage. However, market expectations are more optimistic, projecting double-digit growth. For mid-cap IT companies, J.P. Morgan anticipates low double-digit growth, in contrast to market expectations of mid-teens growth. This indicates that J.P. Morgan holds a more cautious view of the IT sector than broader market sentiments.
Despite the generally negative outlook, J.P. Morgan has upgraded Infosys from “underweight” to “neutral.” This change is based on the belief that lower expectations have already been factored into Infosys’ stock price. Furthermore, Infosys has secured substantial deals, offering a clear outlook on its fiscal 2025 performance.
Indian IT firms are navigating challenging waters as they expect a tough year in fiscal 2024. They keep their sights on fiscal 2025, hoping for a rebound in deal signings and growth. While the journey ahead may be bumpy, Indian IT firms, including Infosys, are holding onto the potential for better days in the coming years.
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