IT companies likely to report flat Q2 revenues, demand outlook in focus

In the absence of any large deal wins and macro-economic challenges, the revenue growth of Indian IT services companies is expected to be flat in Q2FY23 sequentially.

Accenture’s modest revenue growth guidance of 8-11% in local currency for FY24 (ending August) also indicates softness in IT services growth over the next 12 months. 

Analysts, however, expect Infosys and HCLTech to retain their revenue and margin guidance for FY23. 

Wipro, which guides for the quarter ahead, is likely to guide a 1-3% sequential growth in constant currency for Q3FY23. 

Tata Consultancy Services (TCS) will kick off the IT earnings season on October 10.

According to consulting firm Auctus Advisors, interactions with IT clients indicate that the next three-four quarters will be flat in terms of revenue growth. Margins will continue to be under pressure and recruitment may fall to a half of the previous year, with fresher recruitment falling even more sharply.

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“We advise clients to adopt a three-pronged approach during slowdowns. The first is to protect existing clients and contracts, through renegotiations if required. The second is scenario-based planning, with decision triggers built in. This plan must have a strong focus on cost. The third is execution: with new sales slowing down, this is the time to deliver client delight and build systems that will help capture additional growth when the market turns, as it inevitably does,” Abhisek Mukherjee, co-founder and director, Auctus Advisors, told FE.

Global brokerage firm Jefferies expects aggregate revenue growth of 3.6% quarter-on-quarter in constant currency for IT companies under its coverage, in line with last quarter. Among large IT firms, it expects Infosys to deliver the highest organic growth of 4% q-o-q in constant currency. “We estimate Wipro’s growth to be similar to Infosys’s, aided by 100 basis points inorganic contribution from Rizing/Convergence,” Jefferies said.

Margins are likely to remain muted in Q2FY23, led by supply-side pressures, wage inflation, increase in travel and other discretionary costs, according to ICICI Securities. “We expect a 30-90 basis points q-o-q increase in EBIT margin for tier-1 IT and an average of about 100 basis points q-o-q decline for tier-2 IT. Margins are expected to decline by 150-250 basis points on y-o-y basis across the IT pack.”

Revenue growth momentum in H2FY23 would likely be much weaker due to a challenging macro environment and furloughs in Q3FY23 versus past two years that witnessed accelerated deal ramp ups, according to ICICI Securities.

According to analysts at Elara Capital, the key factors to monitor during the second quarter earnings include demand commentary, deal win momentum, growth in BFSI sector, commentary on weakening retail growth, supply-side and attrition trends, hedging policies in the midst of sharp currency depreciation, and furlough indications.

“Expect the disconnect between weak macro and tech leaders’ commentary to narrow down, with outlook turning soft hereon. We do not anticipate guidance upgrades from Infosys, HCLTech and Coforge,” Elara Capital said.

Since last six months, NIFTY IT has underperformed NIFTY 50 by 21%. “We still believe deployment in the sector should be slow and gradual in nature as there would be many unknown risks ahead that might further degrade valuations. We also believe that there might be further time correction in IT stocks until we get clarity on CY23 IT budgets and margin pressures ease off,” ICICI Securities said.