Indian IT Feels The Heat As EPAM Systems Cuts Revenue Guidance
Nifty IT declined the most since April 17 after US-based EPAM Systems cut its revenue growth guidance on tepid dealmaking.
A gauge of Indian IT stocks declined the most in seven weeks after a U.S.-based peer cut its revenue growth forecast, warning of a slowdown in dealmaking.
EPAM Systems Ltd., a Newtown, Pennsylvania-based software engineering firm, expects to clock a revenue of $1.16 billion to $1.17 billion in the quarter ending June 30, according to the transcript of its earnings call posted on Yahoo! Finance. That compares with its previous estimate of $1.19 billion to $1.2 billion. The 2023 revenue is now seen at $4.65 billion as against $4.8 billion earlier.
“We have lowered our guidance based on our current pipeline visibility,” Jason Peterson, chief financial officer at EPAM Systems Inc., said during the earnings call. “Our pipeline has not converted as expected in Q2 and our updated demand analysis suggests that we will not see a significant improvement in the demand pipeline during the remainder of 2023.”
Most of the pain is due to the slowdown in cloud data projects—something Gartner Inc. had warned of in 2022 and earlier this year as well, EPAM Systems CEO Arkadiy Dobkin said. Growth at Amazon Web Services, the world’s largest cloud services provider, is also slowing, Amazon.com Inc. said in its latest earnings statement, as enterprise clients braced for turbulence in the face of a likely recession in the US.
“So at this point, we have to accept that we underestimated the sharpness of the decline in this specific segment of the global IT market, for build and transformational deals,” he said.
The commentary pushed Nifty IT to the lowest since April 17, with all 10 constituents in the red. Mid-tier IT services firms bore the brunt, with Persistent Systems Ltd. declining as much as 5.84% intraday.
“EPAM is high on digital (95%+) and product/software engineering space (35-40%) with Persistent being its closest peer,” brokerage Motilal Oswal said in a note.
The IT services sector in India has clocked its worst performance since the beginning of the pandemic as the spectre of a slowdown—stemming from a banking crisis in the US and the Russia-Ukraine war—roiled dealmaking in financial services to telecom and retail. Software services firms have turned cautious on the demand environment as the likelihood of a recession in the US weighed on discretionary spending.
While bookings are still supported by cost takeout and efficiency deals, revenue growth is impacted by project deferrals, delayed ramp-ups and cancellations. The outsourcers are even more wary of the pricing environment.
Management commentary has indicated that the first half of FY24 is likely to be a washout. Growth is unlikely to return in a hurry, at least not until the geopolitical headwinds ease in the second half of the fiscal.