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Declining 5G spend signals degrowth for IT firms

Declining 5G spend signals degrowth for IT firms

Alarming Bells

  1. Telecom vertical takes a beating, pulls down revenue growth of IT firms
  2. Tech M, which draws 37% of revenue from telecom vertical, posted 4.9% fall in sequential term
  3. Infosys, TCS and other large firms reported degrowth in this vertical

Bengaluru: Weak spend in the 5G space, the client-specific issues and lower discretionary spend in the telecom and communication area have led to negative growth in the vertical. This has dragged the top lines of many Indian IT firms in the second quarter ended September 2023.

According to brokerage firms, the situation is unlikely to change in the current financial year as global enterprises are cautious in their technology spend with regard to new areas of 5G, which has been seen as the major growth drivers for this vertical post its roll out in major geographies.

“Global telecom firms are not keen to invest in enterprise solutions of 5G as their clients are holding back spend owing to uncertain demand environment. Meanwhile, discretionary spend in the telecom vertical has been postponed. These are the reasons for which telecom vertical of most major firms continued to underperform in the second quarter,” said a Mumbai-based analyst.

This trend is amply clear in the Tech Mahindra’s Q2 earning, which was released on Wednesday. Communications, Media & Entertainment (CME), which contributed around 37 per cent to Tech Mahindra’s revenue in Q2, saw the growth rate falling by 4.9 per cent on sequential basis.

“Sharp revenue and margin miss (of Tech Mahindra) are driven by one-offs from the termination of non-core business, made worse due to client-specific issues in the telecom vertical and weak discretionary spending. The pain will continue in the December quarter as well,” Kotak Institutional Equities in a report said post announcement of second quarter earnings.

Not only Tech Mahindra which draws maximum revenue from telecom vertical, but its bigger peers have also reported tepid growth in this vertical during the second quarter. Infosys, which drew around 11.4 per cent of revenue from communication vertical, witnessed a degrowth of 4.3 per cent in constant currency term during the second quarter.

“Growth challenges in communication sector continues, coupled with increasing opex pressures, riskof inflation, high interest rates and supply/demand imbalances are creating near-term uncertainties.Delays in decision-making continues. Our strong large deal signings and pipeline will help supportgrowth in medium term,” Nilanjan Roy, Chief Financial Officer of Infosys has said in the analyst call. The Bengaluru-headquartered firm has signed a five-year mega deal worth about $1.6 billion with Europe-based telecom group, Liberty Global last quarter.

Similarly, Tata Consultancy Services posted -1 per cent growth in its telecom vertical in Q2 of FY24. However, it won a mega deal of about $2 billion from state-run BSNL for rolling out 4G services for the telecom firm.

Experts are of the opinion that despite the current slowdown, large deals won by many IT firms put them in good stead to revive growth in the next financial year.

Debasis Mohapatra
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