- Top tier IT sector companies are expected to report a flat to slight decline in constant currency revenues, sequentially.
- While most analysts agree that TCS will report a flat to no growth and Wipro will show a decline, they are divided on their view on Infosys.
- Analysts expect Infosys to narrow its top end guidance, while Wipro’s quarterly revenue outlook for Q2 is expected to be muted.
Almost all the companies in the sector are expected to post a flat quarter on quarter growth in constant currency revenues.
Demand from financial services, telecom and hi-tech have seen incremental deterioration, and even sectors that aren’t directly impacted by macroeconomic conditions are expected to remain cautious on IT spends.
“Large banks’ IT budgets remain constrained, dampening growth prospects. We expect large-cap IT services players under coverage to report -1.7% to 0.6% CC QoQ growth,” says a report by J M Financial.
Analysts divided on Infosys
While most analysts agree that India’s largest player TCS will report a flat to no growth and Wipro will show a decline, analysts are divided on their view on Infosys.
J M Financial estimates Infosys to be at the bottom of the band with another quarter of sequential decline, along with TechM. But Kotak Institutional Equities expects Infosys to report the highest sequential growth among tier 1 companies.
“Companies that will report revenue declines are Tech Mahindra, Wipro and Mphasis. Infosys is our top pick, followed by HCL Tech,” Kotak Institutional Equities says. IDBI Capital also picked Infosys and TCS as the best bets to weather the storm.
Across the board, most companies are likely to see a decline in EBIT margins in the range of 20-90 bps unless they cut variable compensation. EBIT is earnings before interest and taxes.
“Operating leverage hit resulting from revenue decline and compensation revision for a few companies. Typical levers such as utilization rate and pyramid are difficult to utilize quickly in a low-growth environment,” says Kotak Institutional Equities
Q1 forecasts for QoQ Revenue change CC
Revenue guidance cuts plus deal wins
As uncertainty looms large, the street will be closely watching any news of deal wins especially with regards to large deals, the deals in the pipeline, management commentary regarding deal wins and more.
J M Financial says that deal wins are the only silver lining for the sector. “If TCS’ GBP $840 million Nest deal and Infosys’ $450 million Danske Bank deal are anything to go by, deal momentum appears healthy. We expect most players, with a likely exception of Tech Mahindra, to report robust deal wins,” it says.
In bad times, most companies consolidate their work and give it to one big provider, which are called cost takeout deals. The total cost value or TCV of deals will give a better outlook on how the entire fiscal year will turn out, analysts believe.
Moreover, a few of them also believe companies should tighten their revenue guidance for the rest of the year. Most of them expect Infosys to narrow its top end guidance to 4-6% from 4-7%, while Wipro’s quarterly revenue outlook for Q2 is expected to be muted between -1-1% range.
“Most players had indicated a second half recovery in growth. Now as we get closer, it would be interesting to see if there is any change to that view. It would also be interesting to see if there are early signs of pick-up in discretionary spend or acceleration in cloud adoption because of generative-AI,” said J M Financial.
$NIFTYIT.NSE IT Industry Q1 Earnings Preview In the face of increased competition and recessionary pressures in US and European markets, the IT industry has experienced investor pessimism over the past two years. However, revenue growth is expected to continue at a decent pace. Q1 revenue may be muted due to order cyclicality, but top IT companies have a robust deal pipeline. Margin weakness remains a concern due to rising employee costs and increased investment in AI technology R&D. Nevertheless, the sector holds promising long-term prospects. A bullish sentiment is maintained as the majority of Fortune 500 companies are yet to migrate to the cloud, presenting significant growth opportunities once the flow of money in developed markets stabilize.
— (@Nevat_Investments) July 03, 2023]]>SEE ALSO
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