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Tata Consultancy Services (TCS) managed to exceed the Street's estimates on revenue growth in the December 2022 quarter. But its results indicate that growth for the company and the IT services sector is likely to moderate in FY24.
Order bookings increased just 2.6 percent from the year ago. In the December 2021 quarter, order inflows were up 11.8 percent. Amid macroeconomic uncertainties, clients are delaying decisions on new projects. The nature of order inflows is changing with customers awarding more cost optimisation projects. “IT budgeting cycles have been delayed due to increased caution by clients in North America,” said analysts at Investec Capital Services in a note.
Its employee base declined for the first time in two years. Hiring, a lead indicator of revenue growth, slowed considerably. According to Kotak Institutional Equities, headcount addition trailed revenue growth on a year-on-year basis in the December 2022 quarter. The book to bill ratio moderated sequentially, implying slowdown in incremental orders versus billing.
The orders and hiring trends indicate a sober 2023 for IT workers. Companies are no longer rushing to fill vacancies or poach employees.
For investors, the results reaffirm signs of a growth slowdown. Year-on-year constant currency revenue growth eased from 15.4 percent in September 2022 quarter to 13.5 percent last quarter. Analysts project a 7-8 percent rise in revenues in FY24, significantly slower than the 13 percent or so growth TCS is estimated to clock in FY23.
However, it's still early to take a conclusive view on the FY24 outlook. IT budgets are yet to be finalised and much depends on spending in 2023. A sharper pullback in customer IT spends can adversely impact IT sector’s growth rates in FY24. TCS, with a full spectrum of services, is projected to withstand the slowdown better.
“The order inflow coupled with hiring as well as the management’s cautionary commentary on specific markets clearly point to growth moderation ahead in FY24, after two relatively strong growth years. However, companies like TCS will manage to sail through, thanks to the continuation of technology spending,” writes Madhuchanda Dey in this piece. Do Read.
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