Q2 results analysis: More pain in store for IT firms in 2020, say experts

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Slowdown signs are evident, though subtle, in the results of the two IT majors.

Though Q2 results of Infosys and TCS can be described as a case of contrasts with the former outperforming the latter, slowdown in consumer facing sectors such as BFSI and retail has rattled the IT bellwethers, say experts.

India’s largest IT services firm TCS missed Street estimates after reporting double digit growth in the previous four quarters. This was in part due to slowdown in BFSI, its largest vertical and retail, which the company expected to pick up, and did not in Q2.

For Infosys, while the financial services fared well due to the Stater acquisition in the first quarter, its retail growth declined.

Sanchit Vir Gogia, founder, Greyhound Research, a technology advisory firm, said: “This situation is not great. There is a sense of scare.”

Gogia pointed out that while the IT sector might do well due to festive season till December end, the fourth quarter will especially be challenging.

“The real challenge will start in 2020, when we will see how much investments goes where especially in consumer facing industries like BFSI and retail,” he added.

BFSI has been a cause for concern for the IT majors as large banks in Europe are cautious about investing. There has been softness in the US capital markets as well. Retail as both IT majors pointed, has not picked up and there is not enough visibility yet.

“But it is all dependent on the US economy at a very large level. We will have to wait for the next six months for more clarity to set in,” Gogia added.

The US is the largest revenue generator for IT firms and any macro-economic volatility in the continent will affect the business. There are uncertainties due to Brexit in the Europe, which is also effecting the business prospects for the firms.

Another cause for concern is the possible decline in digital revenues. Pareekh Jain, founder, Pareekh Consulting, said, “For IT firms, growth now depends on digital as legacy business is going down.”

Though digital revenues have been growing steadily at 35-40 percent year-on-year, the pace has declined this year. For instance, TCS’s digital revenue grew only 28 percent in Q2, from over 35 percent in Q1.

Infosys’ digital revenue grew 38 percent in Q2, compared to 41 percent in Q1.

Digital revenues are important given that digital is becoming an engine for growth. For instance, Infosys’ core business growth declined 1.8 percent year-on-year to $1,980 million for the quarter ended September 2019 whereas digital grew 36 percent to $1,230 million.

The second quarter already saw some deal deferrals.

“When the consumer sentiment is low, there might be further delay in projects and that might impact the growth,” he added.Are you happy with your current monthly income? Do you know you can double it without working extra hours or asking for a raise? Rahul Shah, one of the India’s leading expert on wealth building, has created a strategy which makes it possible… in just a short few years. You can know his secrets in his FREE video series airing between 12th to 17th December. You can reserve your free seat here.