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it q2 earnings: Top IT companies may log muted Q2 growth on macro uncertainty


India’s top-tier IT firms are expected to report muted performance for the fiscal second quarter due to continued macro uncertainty and delay in execution of non-core projects, despite strong deal wins by Tata Consultancy Services, Infosys and HCLTech in the last few weeks.

The three-month period through September is usually seen as a strong quarter for the sector. TCS will kick off the quarterly earnings season for India Inc on October 11. Infosys and HCLTech will report results on October 12.

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Kotak Institutional Equities expects revenue at tier-1 IT companies to range between a decline of 0.6% and growth of 0.8% compared with the previous quarter.

“Continued rationalisation of discretionary programmes, combined with extended timelines of execution of existing ones, is leading to a leakage of revenues and weak trends,” the brokerage said.

However, Jefferies expects aggregate revenue to expand 0.5% quarter-on-quarter, marking a return to growth after two quarters of revenue decline. “We note that the growth is still soft, given the challenging demand environment, but expect some stabilisation and deal ramp ups to drive a slight growth uptick,” the global brokerage said.

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For large IT firms, the brokerage expects revenue to be up to 1% higher or lower compared with the previous quarter. “We expect Infosys (1%) to lead on growth, while Tech Mahindra and Wipro (-1% each) are likely to lag.”

Weakness will be broad-based and amplified in the banking, retail and telecom segments, Kotak said, predicting revenue to be between 2.9% lower and 3.2% higher from a year earlier.

The brokerages expect market leader TCS to announce a buyback of shares and shed light on its strategic direction under a new leadership.

TCV to be bumped up

The top tier firms have been announcing large deal wins over the past few weeks. These deals to optimise and lower cost come at a lower margin and longer tenures than usual transformation deals. For example, Infosys announced a $2 billion deal – its largest in three years – to execute AI and automation-led development, modernisation, and maintenance services for an unnamed client. HCLTech won a six-year $2.1 billion deal with Verizon that involves outsourcing of managed network services for Verizon’s enterprise customers.

Kotak forecast $5.5-6.0 billion in total contract value (TCV) for Infosys, up from the last 8-quarter average of $2.4 billion. For TCS, its prediction is $12 billion, up 48% year on year.

“We believe deal flow has steadied after the transition from discretionary spending-powered short-tenured programmes to larger programmes fuelled by cost take-outs, which have longer sales cycles,” it said. The brokerage expects cost take-out deals to continue in the current calendar year along with an improvement in discretionary spending.

FY24 forecast

The record-level deal wins, however, are unlikely to translate into a major change in revenue growth forecast of the Indian IT firms.

Motilal Oswal Securities expects Bengaluru-based Infosys to maintain its revenue growth guidance of 1.0-3.5% and operating margin forecast of 20-22% for the current fiscal year. It expects HCLTech to retain its 6-8% sales growth forecast and 18-19% margin estimate for the fiscal. Jefferies, however, said the management could guide towards the lower end of the margin range.

Most analysts expect a marginal decline in the operating margin (20-100 bps fall) year on year, hurt by the slowdown in growth rates and cut in discretionary programmes, combined with the increase in costs such as on travel and back-to-office expenses. Cost levers are yet to fully kick in. The operating margin will be influenced by the wage revision cycle sequentially, according to Kotak. It added there may be a 100-basis-point uptick in Wipro’s margin on a yearly basis on account of deferred wage hikes.

Last week, IT bellwether Accenture gave a 2-5% sales growth guidance for FY24 and reported a 16% year on year fall in net income for the quarter-ended August.

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