The Indian IT sector has launched the Q2 earnings season on a somewhat muted note. The top three tech giants – TCS, Infosys, and HCL Tech – have presented a rather pessimistic outlook. They cite project rampdowns, revenue challenges, and cautious clients as reasons for recalibrating their revenue earnings for the year.
TCS has reported its first-ever drop in constant currency revenues in four years, while Infosys and HCL have lowered their revenue guidance for FY24. TCS refrains from giving guidance. Infosys now anticipates its constant currency revenues to grow in the range of 1-2.5%, and HCL expects similar growth of 5-6% for FY24.
Despite the expected decline in IT sector stocks over the past two days, brokerages have made only minor adjustments to their earnings estimates while maintaining their buy or add ratings. These companies’ significant deal wins, substantial order books, and confidence in achieving the upper end of their guidance are providing some stability, according to analysts. Very few have altered their ratings on IT stocks.
Analysts from Axis Securities noted that TCS has constructed a resilient business model through securing long-term contracts with major global brands and establishing robust capabilities that position it well to gain market share in the future.
In addition to this, TCS has also announced a ₹17,000 crore buyback at a premium share price relative to its current value, offering potential mid-term prospects.
Kotak Institutional Equities (KIE) similarly expressed confidence in Infosys, pointing out that it has secured a significant portion of large deals that provide visibility for FY25 growth. While KIE reduced its revenue estimates for FY24-26 by 1-2%, it maintained a buy rating for Infosys. For HCL Tech, KIE made slight adjustments to its FY24-26 revenue estimates by 0.3-0.8%.
The disappointing Q2 results were not entirely unexpected, as the industry has been pricing in a potential recession in the US and a slowdown in Europe for over a year. The IT sector has made little headway despite the recent bull run in broader markets.
Over the past month, the Nifty IT index constituents all experienced declines in value, with the exception of LTTS. Coforge, Tech Mahindra, and HCL Tech saw declines of over 4%, while the Nifty IT Index itself lost around 3%.
In times of macroeconomic headwinds, IT companies are diligently working to enhance their margins. Not only have they reduced their workforce additions, but they are also striving for higher utilization levels, reduced subcontracting costs, and decreased discretionary spending, mirroring the actions of their clients.
TCS, for instance, reported an increase in its earnings before interest and tax (EBIT) margins by 110 basis points to 24.3% quarter-on-quarter. Analysts believe that ongoing supply-side advantages should help TCS safeguard and expand its margins, despite lower growth and mega deal ramp-ups in the second half.
HCL Tech and Infosys have maintained their operating margin guidance for the year, even with revised revenue expectations, signaling their commitment to sustaining productivity levels. HCL expects FY24 margins to range between 18-19%, while Infosys anticipates annual margins to be in the 20-22% range.
Analysts from various brokerages support their confidence in these strategies, highlighting Infosys’ ability to manage its workforce effectively and projecting a 30 basis point increase in FY24 EBIT YoY.
Furthermore, all three IT giants reported a reduction in attrition to around 14%, a significant improvement from previous quarters. This decrease is seen as a cushion for better control over personnel costs, unlike the challenges faced in the past year.
In summary, while the short-term outlook for some of these IT companies may see some negative reactions in light of slowed growth and market expectations for higher buyback prices, the long-term trajectory appears to be on an upward trend, as reflected in the recent stock price movement.