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Q2 numbers of TCS, Infosys, HCL and Wipro are above expectations. What about Q3 outlook?

Q2 numbers of TCS, Infosys, HCL and Wipro are above expectations. What about Q3 outlook?

IT services majors demonstrate robust performance in the second quarter, and forecast even better things ahead

The double-digit growth in  the top line in Q2 along with positive commentaries from IT majors and market analysts hint at better days ahead The double-digit growth in the top line in Q2 along with positive commentaries from IT majors and market analysts hint at better days ahead

The performance of Tier I IT companies in Q2 of FY23 was not as depressed as the market seems to be pricing the sector, considering the ongoing slowdown in the US and Europe. The double-digit growth in the top line in Q2 along with positive commentaries from IT majors and market analysts hint at better days ahead.

Sample this: Tata Consultancy Services (TCS) reported 18.01 per cent year-on-year (YoY) growth in revenue at Rs 55,309 crore in Q2, and 8.41 per cent YoY growth in net profit to Rs 10,465 crore. For Infosys and HCL Technologies, revenue grew 23.43 per cent and 19.52 per cent, and net profit grew 11.02 per cent and 6.86 per cent, respectively. Wipro posted 14.60 per cent rise in revenue, but net profit fell 9.39 per cent. “IT majors have shown resilience in their performance despite the current macro headwinds,” says Mohit Nigam, Fund Manager and Head-PMS at Hem Securities. “TCS, Infosys and HCL reported better numbers than estimates while Wipro’s numbers were below estimates.”

The companies are bullish on the future as well. HCL increased revenue growth guidance to 13.5-14.5 per cent in constant currency terms for FY23 compared to 12-14 per cent earlier; and Infosys upped its lower-end revenue growth guidance range for FY23 to 15-16 per cent from 14-16 per cent earlier. In the earnings release, C. Vijayakumar, CEO & MD, HCL Technologies, said: “We remain very positive of our near-term growth. Confidence is generated by our strong bookings and pipeline numbers across every segment.”

Meanwhile, the IT majors’ performance on Dalal Street was tepid. Shares of HCL declined 23 per cent on a year-to-date (from January) basis till October 18, compared to a slide of 25 per cent for the benchmark BSE IT. TCS, Infosys and Wipro also retreated 16 per cent, 20 per cent and 47 per cent YTD, respectively. Market watchers believe that rising costs and bleak margins have dampened market sentiment for the sector in 2022 so far. “But we expect those costs have peaked and will dip as a percentage of revenue going forward, leading to margin improvement,” says Abhimanyu Kasliwal, AVP at Choice Equities.

Agrees Pravesh Gour, Senior Technical Analyst at Swastika Investmart, “Tier I IT companies are better placed to ride the precarious and uncertain business environment due to their scale advantages and presence in multiple verticals.” He further adds that the key takeaway from the Q2 results is that tech spending in the US and Europe remains robust despite the challenging environment. “Demand-side pressures are expected to emerge in FY24 and beyond. Supply-side pressures are abating and attrition levels have peaked,” he says.

 

@iamrahuloberoi