Amid slowdown & rising caution, will IT firms deliver another weak quarter?

BNP Paribas sees in-line results from Indian IT companies and reassuring management commentary may not be enough to revive investor interest yet. However, another quarter without any earnings estimate downgrades should be key to start looking at the sector favourably. The brokerage expects large caps to outperform as it sees large caps’ revenue to grow 0.4-2.6% q-q CC and margin to rise q-q as supply-side pressure eases.

Recently, HCL Technologies tweaked its FY23E guidance to the lower end, but Accenture maintained its FY23E growth guidance. The focus will mostly be on the demand outlook, nature of deals, pricing and attrition trends.

While IT firms witnessed very strong 4-5% QoQcc growth in 3Q of FY21 and FY22 due to the surge in tech spends post-pandemic, rising margin pressures due to inflation alongside opening up of offline activity has reduced the urgency to prioritize tech spending, leading to longer furloughs in 3QFY23, said analysts at Jefferies.

“We expect aggregate Ebit margins to recover by 50bps QoQ in 3QFY23 driven mainly by HCLT, TCS and Coforge. HCLT’s margin expansion will mainly be led by sharper growth in higher-margin product business. TCS’ margin expansion will largely be led by improving pyramid and utilization and Coforge’s margin expansion will be led by rising share of offshoring, improving utilization and operating leverage,” as per the Jefferies’ note.

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Margins for other IT firms are likely to be steady on a sequential basis as slower growth will offset benefits of improving pyramid and easing attrition.

“IT spending in North America and Europe has continued to be relatively strong owing to the demand for digital transformation and cloud transformations. We believe it is likely to remain intact, at least for the quarter. However, at the current juncture, vertical commentary for the quarter stands critically important from major service providers, especially Retail Vertical, CPG, and BFSI,” according to Axis Securities which estimates IT services to report revenue growth in the range of 0.5%-4% QoQ in $ terms and the sector to deliver QoQ revenue growth of 2.4% to 9.5% in rupee terms.