The IT sector is likely to register healthy revenue growth for the second quarter result of the current financial year (Q2FY23). However, more than the numbers, investors may focus on management commentaries on trends of attrition, demand outlook and hiring trends from the IT players when they release their quarterly scorecard.
"The IT sector is expected to post resilient Q2 performance in the context of the macro environment. Tier-1 IT is expected to deliver sequential growth in the range of 2.4% to 4% CC. Cross currency impact severity will be similar to last quarter with -1.3% to -1.8% sequential impact for Tier-1. Although a larger band (0.9% to 5.3% QoQ), mid-tier IT’s growth outperformance (versus Tier-1) is expected to continue in Q2," said brokerage firm HDFC Securities.
The brokerage firm highlighted that within the mid-tiers, Tata Elxsi, Mindtree, and Persistent are expected to lead at above mid-single digit sequential growth. Supply-side normalisation (monthly decline in job postings and job indices) can be construed as positive from the operational/margin perspective, said HDFC Securities.
Brokerage ICICI Direct expects the revenue growth of Indian IT companies to continue in Q2, however, margin expansion is likely to be restricted due to continued high attrition.
For Indian IT companies’ revenue performance expects to be strong in Q2, barring weakness in a few companies due to company-specific events i.e seasonal weakness in P&P business for HCL Tech which will likely overshadow stable performance in other verticals while Tech M business is expected to be impacted by planned exit from some of the low margin portfolio (largely in BFSI space vertical wise and Asia region geography wise) which shall impact revenues by nearly 1% for the quarter),” ICICI Securities said.
ICICI expects IT companies to post CC revenue growth between 3-5% for Q2FY23 with Infosys being at the higher end (5% CC revenue growth) in Tier-I IT companies while TCS, Wipro & HCL Tech (IT services) are expected to post constant currency (CC) revenue growth of 3%, 4% & 3.5% QoQ respectively.
Among tier II IT companies, ICICI Direct expects Mindtree to post revenue growth of 5% QoQ in CC while TechM, LTI & Coforge are expected to post a growth of 2%, 3% & 4.5% respectively in CC terms.
“We expect cross currency headwinds in the range of 100-150 bps impacting the dollar revenues of the companies. We expect TCS, Infosys, Wipro & HCL Tech to post dollar revenue growth between 1.5-3.5% QoQ while TechM, LTI,
Mindtree & Coforge are expected to post a revenue growth between 0.5-4% QoQ. We prefer Infosys, Mindtree, Coforge,” said ICICI Direct.
Brokerage firm Motilal Oswal Financial Services expects its IT services coverage universe should deliver median revenue growth of 4.2% QoQ and 15.4% YoY in CC terms in 2QFY23E. Growth in EBIT/PAT (5.9%/9.1% QoQ) should be aided by seasonal margin improvement, although the impact is muted due to continued supply-side pressure.
“With a weakening macro environment and looming fears of recession, we will be watchful of any moderation in the demand commentary across both Tier I and Tier II companies in the IT Services space. While our recent discussions with various managements indicate continued spending on technology services, we expect some impact across sectors (led by Retail and Manufacturing) for the remainder of the year,” Motilal Oswal said.
“The growth deficit in Tier I players versus Tier II peers will further narrow in Q2FY23. We see a limited change in the FY23 revenue growth guidance of Infosys, HCL Tech, Coforge, and L&T Tech Services in Q2, given the unchanged demand commentary,” said Motilal Oswal.
Disclaimer: The views and recommendations given in this article are those of broking firms. These do not represent the views of MintGenie.
