The earnings season kicks off with TCS on January 9, followed by Infosys and HCLTech on January 12 and Wipro on January 13.
IT majors Tata Consultancy Services (TCS), Infosys, Wipro and HCL Tech are set to announce their Q3FY2023 results next week. Analysts expect growth to be impacted by seasonal factors as well as macro indicators.
The third quarter is a seasonally weak quarter for IT companies due to fewer working days as well as furloughs. This time, it’ll be further impacted by the deteriorating macro.
1. Revenue growth
Analysts at Kotak Institutional Equities said they expect muted revenue growth of 0-3 percent, and revenue growth will moderate to high single-digits to low teens on a year-on-year (YoY) basis.
The moderation, they said, will be due to the slowdown in segments like mortgages, hi-tech, and retail and telecom. It said that furloughs have been higher than usual, particularly in the hi-tech segment, after escaping their impact over the last two years.
Emkay Global, in a note, said that revenue growth is expected to moderate “on account of furloughs, lower number of working days, deferred spending by a few clients, and increased cautiousness among clients amid macro uncertainties and high inflationary environment.”
Emkay expects CC revenue growth of 0.8-3.7 percent for tier-1 companies, and -0.4 to 3.4 percent for mid-cap companies.
“We expect the usual seasonality in H2 growth to be amplified by slower decision making and weak discretionary spending due to macro uncertainties,” it said.
2. Furloughs
“..We expect revenue growth to reset from mid-teens to mid to high single digits from tight tech budgets and pricing pressure after higher-than-expected furloughs in Dec 2022,” analysts at JP Morgan said in a note.
Nirmal Bang Institutional Equities said that weakness is expected to be accentuated by company-specific disappointments due to higher furloughs, primarily in the BFSI and hi-tech sectors.
According to JP Morgan, commentaries from companies suggest that furloughs in Q3FY23 will also drag into Q4 due to clients being cautious, which implies a destruction in demand.
3. Margins
Emkay Global said margins are expected to expand 20-100 bps, sequentially, for tier-1 companies, and 20-50 bps for tier-2 companies.
“While margins will improve on a QoQ basis for the entire coverage universe, we think they will disappoint vis-à-vis prior expectations…. There will be pressure from weaker-than-expected revenue growth, lower utilisation QoQ, tail-end of wage pressures, higher travel and higher sales and marketing spends,” a note by Nirmal Bang Institutional Equities read.
“Thus, while we expect QoQ CC revenue growth for players under our coverage at 1-3.5 percent and QoQ margin improvement, the investor focus is more on FY24. The Q4FY23 commentary will be keenly evaluated to see how the new year starts off,” the note added.
However, Motilal Oswal said that the weakening macros and recessionary fear has had “had lesser adverse impact on the overall demand environment than it was anticipated at the beginning of the quarter.”
It expects some margin improvement in Q3. “Though improved utilisation, billable freshers and favorable FX (for some companies) are likely to provide some margin tailwinds, the same will be partly offset by the adverse impact from furloughs and higher proportion of cost take-out deals,” it said.
4. IT Spends
For the full calendar year, Kotak expects moderation in IT spending, and that IT services managements may not have full visibility. It expects TCS and HCL Tech to report a relatively better quarter, while Tech Mahindra and Mphasis are expected to lag.
According to ICRA, Indian IT services are susceptible to macroeconomic uncertainties and adverse regulatory changes in key operating markets it operates in as it generates 60-65 percent revenues from the US market and 20-25 percent from the European market.
“Growth in the BFSI segment, one of the key segments for IT companies, has tapered more than other segments in recent quarters, and this is partially attributable to lower lending activity. Moreover, if the macroeconomic headwinds persist, mortgage lending and the retail segments are expected to witness relatively higher moderation in growth, compared to the manufacturing and healthcare segments. While the current healthy order book position from clients will support a healthy growth over the near term, the evolving macroeconomic situation is likely to result in lower order inflows, going forward,” said Deepak Jotwani, Assistant Vice President & Sector Head, ICRA.
BNP Paribas, on the other hand, said that while the macro backdrop is uncertain, lateral data suggests IT spending will be resilient and that medium-to-long-term growth drivers are intact.
5. Guidance
Kotak Institutional Equities said it expects Infosys to retain its guidance of 15-16 percent CC revenue growth and 21-22 percent as EBIT margin for FY23. HCL Tech is also expected to retain its guidance of 13.5-14.5 percent revenue growth and 18-19 percent revenue guidance. For Q4FY23, it expects Wipro to guide 1-3 percent revenue growth.