The IT sector, once again in favor with investors, faces a challenging third quarter marked by contracted revenues, sluggish deal conversions, and soft demand. Here’s a closer look at what to expect:

Impact of Seasonal Trends and Wage Hikes

The third quarter traditionally witnesses increased furloughs or temporary work halts, but this year, the impact appears more pronounced than usual. Apart from HCL Tech, expected to show over 4% growth in constant currency revenues, most other companies are likely to experience flat or declining revenues.

Infosys and Wipro might bear the brunt of revenue and margin pressures due to wage hikes implemented during the quarter. Meanwhile, TCS is anticipated to witness flat to slight growth, driven by significant deal ramp-ups such as the BSNL deal.

According to Girish Pai, an analyst at Nirmal Bang, this seasonally weak quarter may see higher furloughs than historical norms, impacting both revenue and margins due to deferred salary increases.

Varied Growth Predictions for Mid-tier Companies

Mid-tier companies are expected to fare relatively better than larger peers. However, they too might revise down revenue growth targets for the fiscal year, aligning with the trajectory of major players.

IDBI Capital’s report suggests that Infosys may adjust its guidance from 1-2.5% to 1-2%, while Wipro could guide -1 to 1% QoQ revenue for Q4FY24E. Cyient and Coforge are also anticipated to narrow their guidance ranges.

Uncertain Deal Commentary and Outlook

Volatile demand conditions are likely to prompt most companies to remain cautious about providing deal commentary. This uncertainty leaves brokerages with unanswered questions about the sector’s outlook.

Key Metrics to Monitor

Investors will closely watch the pace of total contract value (TCV) conversion into revenue, any compression in the existing book, and trends in discretionary spending. TCS’s strategic direction under its new CEO and Infosys’s commentary on its CFO’s departure and the loss of a significant $1 billion deal will be crucial points of interest.

Shifting Growth Projections for FY25

Earlier confidence in the translation of strong deal wins into FY25 growth has waned, with uncertainties leading to a revision of estimates. Nirmal Bang’s analysts have adjusted their FY25 estimates, citing concerns about the underlying macro assumptions.

Market Dynamics and Expectations

Despite facing a challenging year, the recent market rally has seen the IT sector outperforming. However, weak earnings performance in Q3 may pose a challenge for investors accustomed to recent successes.

In summary, the IT sector braces for a quarter marked by cautious optimism, with stakeholders closely monitoring key indicators amidst a backdrop of economic uncertainty and shifting market dynamics.