Q3 Earnings Preview | Infosys, HCL Tech results today: Who will perform better than the other?

IT majors Infosys and HCL Tech are expected to report their third-quarter earnings for the financial year 2022-23 (Q3FY23) later today. 

Earlier this week, TCS kick-started the Q3 earnings season, missing estimates as clients tightened spending amid a challenging macroeconomic environment that prompted the country's top IT exporter to reduce its workforce.

For Q3FY23, TCS posted a 11 percent year-on-year (YoY) rise in its net profit at ₹10,883 crore vs ₹9,806. Consolidated revenue from operations for the quarter came in at ₹58,229 crore, up 19.1 percent YoY from ₹48,885 in the same quarter last year. In constant currency (CC) terms, the revenue rose 13.5 percent YoY led by growth in North America and the UK.

Overall, the IT services sector is expected to report moderate growth in Q3FY23, primarily on account of the seasonally weak quarter and a slowdown in growth momentum led by uncertainties in the US and UK. However, IT spending in North America and Europe has continued to be relatively strong owing to the demand for digital and cloud transformations.

Now, let's look at what is expected from Infosys and HCL Tech in Q3.

According to experts, Infosys' Q3 revenue is likely to rise around 18-19 percent year-on-year (YoY) to ₹37,838 crore, while its net profit may grow by 9-15 percent to ₹6,470 crore. On the other hand, HCL Tech's revenue is likely to jump around 16-17 percent YoY to ₹26,000 crore and its profit may jump around 8 percent to ₹3,700 crore.

Dollar revenue for HCL Tech is seen rising around 6-7 percent while for Infosys, around an 8-9 percent jump is expected. Analysts peg EBIT margins for HCL Tech to see an uptick in the range of 40-60 basis points (bps) QoQ to 18.5 percent in Q3FY23, driven by easing supply-side constraints, better utilisation levels, and higher growth in products and platforms (P&P) business segment. Meanwhile, for Infosys, the EBIT margin is expected to improve by 30-50 bps to 21.7 percent led by better utilization and easing of supply-related challenges.

Let's see what brokerages have to say

Reliance Securities: For Infosys, it expects a sequential constant currency revenue growth of 1.3 percent, due to large deal wins despite seasonal weakness. It also sees QoQ expansion in EBIT margin of 27 bps due to scale and better supply.

For HCL Tech, it expects constant currency revenue growth of 3.3 percent QoQ on the back of strong double-digit growth of 20 percent QoQ in the P&P business due to seasonality. It also expects the EBIT margin to expand by 53 bps QoQ due to higher P&P growth, better utilization and scale.

ICICI Direct: As per the brokerage, Q3 is seasonally a weak quarter for Infosys due to furloughs. However, the asking rate for Infosys as per annual guidance is around 0.5-1.1 percent QoQ revenue growth in CC for the next couple of quarters, which is not an uphill task. 

It expects Infosys to report 1 percent QoQ CC growth for Q3 as there would be the continued impact of the slowdown in a few pockets of BFSI (mortgage), retail, hi-tech & telecom and Europe as a region. The company is expected to report rupee revenue growth of 3.3 percent QoQ, to be aided by rupee depreciation. 

EBIT margins are expected to improve by 20 bps QoQ led by cost optimisations on easing of supply-side pressure, lower subcontractor costs, and rupee depreciation. Deal momentum is expected to continue while a mix of deals is expected to be skewed toward cost-take-out programs. It does not expect Infosys to change revenue, and EBIT margin guidance for FY23 as the asking rate to achieve those seems not stretched.

As indicated by HCL Tech on its investor day in December 2022, furloughs this year are expected to be higher than in previous years and are likely to impact its revenue growth in IT services in Q3 as well as in H2, said the brokerage. It expects HCL Tech to report 2.5 percent QoQ revenue growth in IT services in CC terms, to be impacted by some pockets of weakness due to macro concerns while P&P business, which is seasonally strong in Q3, is likely to report 15 percent revenue growth in CC terms on a low base. It has factored in 50 bps cross-currency headwinds for IT services for the quarter. In dollar terms, revenue is expected to grow 3.4 percent QoQ, aided by the P&P business. Rupee revenue is expected to grow 6.1 percent QoQ. 

On the margin front, it expects EBIT margins for the company to improve 30 bps QoQ, to be aided by a rebound in P&P (high margin business), easing of supply-side pressure and rupee depreciation while wage hike being a headwind. Since the company already indicated that it would be at the lower end of the revenue guidance given for FY23 in CC terms, ICICI Direct does not expect the company to revise guidance downward.

Dolat Capital: For Infosys, it expects a sequential growth of 1.3 percent on a CC basis lead by strong performance across verticals. OPM is expected to improve by 40bps QoQ driven by strong forex gains, improved utilization and easing attrition. PAT is expected to improve by 7.8 percent QoQ basis.

For HCL Tech, the brokerage expects a 2.5 percent QoQ CC growth from continued momentum in the services business and strong net new TCV wins in H2FY23. OPM expansion by 40bps from strong forex gain and growth of high-margin product business may be seen. PAT is likely to improve by 8 percent QoQ, it added.

B&K Securities: For Infosys, the brokerage noted that as of now, there is no impact of the macroeconomic environment towards demand or growth, but management mentioned that there are a few pockets in which softness is seen such as in the mortgage business, retail, telecom and hi-tech (in the discretionary spending areas of these verticals). It added that the management mentioned that the company is witnessing an acceleration in both cost optimisation and transformation deals and expects this trend to continue in the coming quarters.

For HCL Tech, it said that the demand is looking strong, as of now, but there are growing concerns at clients’ end owing to macroeconomic uncertainty. On the vertical front – the company expects growth to be spread across verticals and regions, added the brokerage.

Nirmal Bang: For Infosys, the brokerage believes that with FY23 revenue growth guidance (15-16 percent in CC terms) and margin guidance (21-22 percent at the lower end) tightened down, it expects the company to only achieve the lower end of the guidance in both cases. It does not see any further changes to the guidance for FY23.

For HCL Tech, it noted that higher-than-expected furloughs in Q2 will mean lower utilisation and the margin gains will be driven more by rupee depreciation and due to a slight shift in revenue mix towards higher margin P&P business. It further stated that the firm has hinted at a record pipeline with a good mix of large and mid-sized deals. The firm believes it will continue to win deals in North America while Europe may see some slowdown, added the brokerage.

Key things to watch out for in Infosys Q3 earnings:

- Any revision in FY23 revenue guidance.

- Margin and vertical-specific outlook.

- Large deal wins and project-specific pipeline.

- Attrition-related comments.

- Tech budgets by the clients.

- Geography-specific comments

Key things to watch out for in HCL Tech Q3 results:

- Vertical-specific and margin-related commentaries.

- Attrition and geography-specific outlook.

- Tech spending by the clients and geography-specific commentaries.

- Large deals and pricing-related outlook.