SaaS, digital firms’ projections indicate weak Q1 for Indian IT firms

There may be a further demand slowdown for Indian IT firms in the quarter ending June, going by the latest results of global software-as-a-service (SaaS) and digital engineering firms.

Analysts though expect the demand to revive in the second half of 2023-24 as deal pipelines remain strong and there would be additional business from cost-optimisation initiatives that will benefit the Indian IT sector.

According to a ICICI Securities report, SaaS and digital engineering companies’ commentary and revenue guidance suggests weak demand in the June-ending quarter with subsequent revival of demand in the second half of the fiscal. “(This is) because, even though the sales cycle is lengthening, the pipeline is not shrinking. Plus, there is demand from cost-optimisation opportunities,” it said.


Indian IT companies have sell-to and sell-with partnerships with SaaS firms like Servicenow, Salesforce, Snowflake and Workday, while the performance of digital engineering firms like Globant, EPAM and Endava can be considered a proxy for high-end digital services demand, said the note by research analysts Sumeet Jain and Aditi Patil.

Digital components take up at least 40% of a typical Indian IT firm's revenue.

Most companies do not disclose their revenue breakup. Infosys does. And the Bengaluru-based IT major’s digital share was 62.2% of total revenues in FY23, up from just 25% five years ago.

Also read | Indian IT companies ready to face headwinds: report

Kotak Institutional Equities, too, expects a weaker first quarter for the Indian IT sector. “Delays in client decision-making and pullbacks in discretionary spending have implications for the growth of Indian IT. We expect revenues in the first quarter of FY24 to be weaker than fourth quarter of FY23 across companies in our coverage universe,” the brokerage said in a note on Tuesday.

The demand environment is especially weak in financial services and technology segments, and any prolonged recovery in clients’ willingness to spend would imply downside risks to revenue growth estimates for financial year 2024, the note said.

Kotak also noted digital engineering firm EPAM’s 0.5% to 3.5% fall in revenue estimated for calendar 2023. The company expects recovery in discretionary spending to take two to four quarters, implying year on year revenue uptick only in the first half of calendar 2024.

This observation is an extension of management commentary shared by top IT firms at earnings calls for their March quarter results. Invariably, all leading Indian IT firms – Tata Consultancy Services, Infosys, HCLTech and Wipro – had called out project delays or ramping down of deals because of weak macroeconomics and tightening of spends. Also, the banking crisis stemming from US regional banks in March had further worsened sentiments.

Digital demand sustainable

US-based cloud computing firm Servicenow has said that digital transformation deals are here to stay. Executives of the firm mentioned that the company’s pipeline is robust for the rest of CY23.

US-based cloud software firm Workday acknowledged that the economic environment is uncertain, which causes increased scrutiny and lengthening of sales cycles, but said it believes that even if net new opportunities get delayed, these opportunities don’t get cancelled.

Deal pipelines are healthy and growing despite higher scrutiny and lengthening of the sales cycle and, therefore, SaaS and digital companies believe digital transformation demand is sustainable, ICICI Securities said in its note.