Infosys to lead IT sector’s Q2 show with 4% revenue growth, says Jefferies

Infosys to lead IT sector’s Q2 show with 4% revenue growth, says Jefferies
  • Infosys is expected to report a 4% Q-o-Q revenue growth for the second quarter, says a Jefferies report.
  • The report also says that Infosys is expected to announce a buyback along with its second-quarter results.
  • TCS is expected to post the best margin improvement among IT companies of upto 50 basis points.
  • All eyes on Infosys, HCL Tech, and Coforge for any revision in FY23 guidance.
IT major Infosys is expected to report a 4% quarter-on-quarter revenue growth in constant currency for the second quarter of FY23, according to a Jefferies report. This growth will be driven by deal ramp ups and seasonal strength, says the research firm, which estimates the Indian IT sector revenue growth at 3.6% for the quarter.

The report also said the Bangalore-based IT firm was expected to announce a buyback along with the second quarter results on October 13. A buyback reflects the company’s optimism about its own stock and is increasingly used by companies to reward shareholders. It also reduces the outstanding shares in the system and boosts the stock price.

Along with all IT stocks, Infosys’ stock price too was battered for the last six months as it fell by over 35% on fears of recession in its biggest market, the US.

Jefferies, however, shares some of the optimism of the Infosys management on the company’s prospects as it believes that it is ‘better placed’ to handle cross-currency headwinds – the Pound and Euro have been depreciating while the Dollar has been appreciating.

“We expect EBIT margins to expand by 30bps QoQ, driven by pyramiding, operating leverage and pricing benefits, amidst supply side pressures, higher costs and continued investments in growth. We expect Infosys to retain its 14-16% YoYcc (constant currency) revenue growth guidance and 21-23% margin guidance,” said a Jefferies report.


Wipro too is expected to match Infosys’ revenue growth, on an inorganic basis.

TCS to lead in margins
TCS is expected to post the best margin improvement of up to 50 basis points, much higher than the sectoral estimates of 30 basis points.

“We estimate EBIT margins to improve by 50bps QoQ to 25.6%, driven by pyramiding, operating leverage and pricing benefit, amidst continued pickup in travel/discretionary expenses and supply side pressures,” the report said. Jefferies estimates TCS’ revenue to grow at 3.5% in constant currency for the quarter.

Most other IT companies will continue to face the pressures of wage hikes and high attrition. A recent report by TeamLease predicts up to 55% growth in contract staffing attrition for FY23 as compared to 49% in FY 2022.

“We expect wage hikes at HCL Tech, Wipro, TechM, and Mindtree; continued supply-side pressures; and higher travel costs to weigh on margins. However, this is likely to be offset by benefits from improved pyramid, operating leverage, and pricing and recovery of some one-off costs in the previous quarter,” the report said.

Demand trends going ahead
The recent revenue forecast given by Accenture of 8-11% for FY23 has sounded alarm bells across the IT sector, as it was below estimates.

“Given increasingly high odds of global recessions, investors remain worried about the likely impairment on tech spending, which has driven (a) correction across the sector through CY22YTD,” said a report by JM Financial.

The research firm suggests that the focus must shift to near-term demand trends. “A few Tier II techs have been suggesting about possibilities of certain client- specific challenges and higher- than-expected furloughs in 3QFY23,” the JM Financial report said. However, it believes that the supply-side headwinds ‘are easing somewhat’.

Jefferies also says that the focus will be on management commentary on the demand environment. “Commentary around deal pipeline, sales cycle, nature of deals and deal tenure, pricing, and vendor consolidation will be keenly watched. Furthermore, there will be a strong focus on commentary around client budgets or reprioritisation of client spends,” it said.

It will also be closely watching for a revision in FY23 guidance from Infosys, HCL Tech, and Coforge. However, it doesn’t expect it to happen as part of the second-quarter result announcements.

$NIFTYIT.NSE Sector at support Recovery should come in the sector with the positive results from $INFY.NSE and $TCS.NSE

— (@ThinkProfit) October 03, 2022

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