Most large and mid-sized IT companies experienced a sequential drop or softness in revenue from Europe during the June quarter. This decline, analysts said, was largely due to volatile market conditions, short-notice decision-making by customers, and a slowdown in large deals, especially in the manufacturing vertical.
During FY24, the IT firms had witnessed strong deal wins and revenue inflow in the region.
Among the big players, Tata Consultancy Services (TCS), HCLTech, Infosys and Wipro reported revenue decline in Europe.
TCS, Wipro and Infosys each experienced a 20 basis points (bps) decline in Europe.
HCLTech saw a significant 100 bps fall in European revenue, largely due to the underperformance of its recent acquisition, ASAP Group, particularly in the German automotive sector. “There’s noticeable softness in the automotive segment, especially in Germany, which is exerting pressure,” CEO C Vijayakumar said.
Pareekh Jain, CEO of EIRTrends and Pareekh Consulting, said, “Last year, the Europe revenue was very good compared to the US and it was coming on the back of large deals. And now, in the last few months, we have not seen so many large deals in the region, especially the billion-dollar-plus deals.”
He pointed out that Europe struggling with a poor macro situation with high interest rates and additional factors such as the UK elections could have led clients to move to a wait-and-watch mode and hold back their discretionary expenses for the quarter.
“Primarily, Europe has been difficult for Indian service providers because of the language constraints and a need to have their centres there. So, that’s why you see many companies acquiring in Europe now. Europe will require a lot more effort to penetrate versus the US,” Jain added.
After seeing a strong growth in FY24, the manufacturing vertical of IT companies also showed softness in the June quarter this fiscal.
“In the US, they (IT companies) are seeing recovery in the BFSI vertical, especially in the sub-segments such as payments, risk & compliance etc, while slower growth in the manufacturing vertical is hurting them in Europe,” an analyst from a domestic broking firm said.
Wipro’s revenue contribution from manufacturing fell 20 bps sequentially in April-June and declined 90 bps on a year-on-year basis. While Infosys and TCS saw flat performance in this vertical, HCLTech and LTIMindtree witnessed a decline due to project completions and seasonal factors.
“Our ER&D services saw a slight decline sequentially due to ramp downs in manufacturing and mid-tech verticals,” the HCLTech CEO said in the post-earnings press conference.
In a similar vein, the Wipro management during the post-earnings press conference said, “On manufacturing, we have experienced some continued softness. This is largely because of some of the large programmes that have ended and we have not won enough, and as a result, the growth rates are, you know, soft.”
The manufacturing vertical contributes approximately 6-10% of these IT companies’ revenue.
Despite the challenges in Europe, IT companies remain cautiously optimistic in the US. TCS is committed to maintaining its aspirational operating margin band of 26-28% for FY25. CEO K Krithivasan said, “Diversification of revenue has been an important strategy and we look at these markets as very important growth levers as we go forward.”
Infosys also raised its sales forecast for fiscal 2025, hinting that clients are gradually increasing their technology spending.
Meanwhile, HCLTech is banking on its pipeline and recent wins to improve performance in the coming quarters.
Vijayakumar expressed confidence in the company’s ER&D services, saying, “With the pipeline we have and some recent wins, we believe it will pick up.”
Analysts from Kotak Institutional Equities noted a positive shift in the business outlook for BFSI firms, with increased guidance from large US and European firms. The recovery in capital markets and improved macroeconomic conditions are expected to drive better performance in the BFSI sector. However, analysts also highlighted potential downside risks from insourcing, GenAI adoption, and legacy retirements.
Source: The Financial Express
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