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TCS, Infosys, IT cos Q1FY23 results preview: Revenue growth, hiring to cool off, lower margins on wage hikes

India’s largest IT company Tata Consultancy Services (TCS) will kick-off earnings season this week with its first-quarter FY23 results scheduled on Friday, 8 July 2022.

TCS, infosys, IT sector
TCS share price lost 13 per cent in April-June 2022, and 14.5 per cent so far this year (YTD).

India’s largest IT company Tata Consultancy Services (TCS) will kick-off earnings season this week with its first-quarter FY23 results scheduled on Friday, 8 July 2022. TCS share price lost 13 per cent in April-June 2022, and 14.5 per cent so far this year (YTD). During the quarter ended 30 June 2022, the Nifty IT index plunged 23.14 per cent, as against a fall of 10.7 per cent in the Nifty 50 index. Analysts believe that in the first quarter of the current fiscal sectoral revenues might grow at 3.6% sequentially CC in 1QFY23, driven by continued demand momentum, but impacted by a 200bps cross-currency hit. EBIT margins may contract by 80bps QoQ due to wage hikes, visa costs and supply side pressures, partially offset by INR depreciation. Hiring and attrition may start to cool off, while travel and sales and marketing costs may rise.

IIFL Securities said that sector growth may slow down to 10% in FY24ii, and believe there would be re-acceleration thereafter. While near-term stock performance will be driven by noise around the developed-market macro, it expects the sector to compound at low teens over the medium term. “Valuations are below the 5-yr avg, while growth could be better, in our view. Hence, we keep our positive stance on the sector despite near-term concerns,” the brokerage firm said.

Tata Consultancy Services (TCS): Prabhudas Lilladher expects healthy revenue growth of 4% sequentially CC given ramp up of strong order book won in earlier quarter. It expected lower growth of 2% sequentially in USD terms due to cross currency headwinds of 200bps. It sees 90-100bps quarter-on-quarter decline in EBIT margin due to wage hikes, higher retention costs and increase in travel costs. The brokerage firm expects investor to focus on whether there is any change in nature of demand, for example more cost focus, due to weak macro environment; presence of large and mega in deal pipeline; hiring, attrition and onsite wage inflation trends and
its impact on margins ahead.

Motilal Oswal has recommended to buy TCS shares with a price target at Rs 3,730 apiece. It expects that in CC terms, growth should continue to remain in a narrow band, but reported growth will be impacted by cross-currency movements. It also expects a strong demand for commentary. Analysts at the brokerage firm see margin in 1QFY23 to be impacted by the wage hike and continued supply-side pressures. It also noted that deal wins and impact of macro weakness on growth will be key monitorables.

IIFL Securities believes that record-high order books will drive growth. It forecasts revenue growth of 3.6% cc sequentially in the first quarter, led by the record high order book and continued demand momentum for core transformation. It expects margins to decline by 170bps sequentially, due to the impact of wage hikes, visa costs and increasing travel costs. Analysts say that key comments to watch out for would be deal win momentum and nature of deals; any early signs of current macro environment impacting the demand environment or decision-making; supply-side challenges; and FY23 outlook on growth and margins.

Infosys: Prabhudas Lilladher expects strong revenue growth rate of 3.2% sequentially USD (4.5% QoQ CC) driven by seasonal strength and healthy ramp up of deals. It expects margins to decline by 90bps sequentially led by wage increments and higher visa and travel costs. Analysts also expect Infosys to retain FY23 revenue growth guidance of 13-15% on-year CC and EBIT margin guidance of 21-23%. Prabhudas Lilladher expects investor to focus on pipeline of large
deals, impact of high inflation and challenging macro environment on tech spending, onsite wage inflation and attrition trend, and update on pricing given high inflationary environment.

Motilal Oswal Financial Services has given a ‘buy’ rating with a price target at Rs 1,670 apiece. It expects infosys to reiterate its FY23 revenue growth guidance of 13-15% on-year in CC terms and maintains a positive commentary. Analysts expect an incremental impact on margin on account of a wage hike and continued supply-side challenges. In CC terms, Infosys should deliver a USD revenue growth of 3.9% QoQ, aided by a low base in 4QFY22, although adverse cross-currency movements will drag reported growth. It added that commentary on deal wins and any elongation in deal conversion will be a key monitorable.

IIFL Securities forecasts 3.5% cc QoQ revenue growth for Infosys, driven by broad-based momentum across verticals. It said that deal momentum should remain healthy, as clients continue on their digital and cloud journey. The brokerage firm expects margins to be flat QoQ despite wage hikes for junior employees, given the absence of visa costs and one-off client related costs from 4Q. It also expects Infosys to retain its guidance of 13-15% cc YoY revenue growth and 22-24% EBIT margin for FY23. The key comments to watch for would be deal wins and pipeline; any changes to FY23 guidance; commentary related to supply-side challenges and attrition trends; and impact of macro concerns on demand.

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