Even as the earnings season for the June 2022 quarter starting this week with IT company TCS first declaring its financial results on Friday, analysts said the growth of Indian IT companies is expected to pick up in the first quarter, barring weakness in a few companies due to company-specific events. Here’s what the analysts expect about the Q1 IT earnings:
“Margins are expected to take a hit on a QoQ basis on account of annual wage hike cycle for a few while rationalisation of employee costs for others. Margin impact will also be on account of visa related costs as well as uptick in travel related expenses as the economy opens up,” according to a report by ICICI Direct Research.
It added that the demand environment is expected to be strong due to continued deal momentum led by sectors like BFSI, insurance, etc, but we need to be watchful on how macro as well as geopolitical risks play out, especially in H2FY23, which is expected to set tone for FY24 numbers. “We expect Infosys and HCL Tech to maintain their annual revenue and margin guidance.”
BNP Paribas in its report said, “Our analysis of commentaries of global IT Services companies indicate a weak near-term margin outlook. Accordingly, we see 0-150 basis points q-o-q margin contraction for our coverage companies in 1Q. For our large-cap coverage, we expect revenue to grow 2.8-3.9 per cent q-o-q CC (constant currency). We expect midcaps’ US dollar revenue to grow 2.5- 9.9 per cent q-o-q. We expect Infosys (13-15 per cent) and HCL Tech (12-14 per cent) to retain their FY23 CC revenue growth and margin guidance, however, we see them highlighting lack of visibility on 2HFY23 demand. We expect Wipro to guide for 1-3 per cent CC q-o-q 2QFY23 revenue growth.”
The report added that given the strong correlation of India’s IT services revenue growth with US IIP growth, PNB Paribas sees growth slowing in line with a macro slowdown in the US. “We continue to see faster digital adoption driving strong medium-to-long-term growth potential of the sector.”
ICICI Direct Research said that due to the unfavourable currency movements, there would be cross-currency headwinds, which are expected to impact dollar revenues for the quarter. Rupee revenues for the quarter are expected to be aided by rupee depreciation against dollar.
“We expect TCS, Infosys and Wipro to post constant-currency (CC) revenue growth in the range of 2.5-4.5 per cent quarter-on-quarter, while HCL Tech is expected to post weak growth of two per cent q-o-q due to continued weakness in P&P business and also muted IT services business. TechM is also expected to post 2 per cent q-o-q revenue growth due to seasonal weakness in its Comviva business. LTI is expected to post 3 per cent q-o-q CC growth factoring in absence of pass-through revenues (2-2.5 per cent impact) for the quarter,” it added.
ICICI Direct also said the attrition across companies would continue to be high and, hence, cost to backfill attrition (at higher costs) and costs related to retention, bonus, rationalisation of compensations are expected to put pressure on margins. This quarter margins also would be impacted due to uptick in travel expenses as the economy opens up and visa-related costs.
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