TCS, Wipro, Infosys: Analysts see another weak quarter for IT sector in Q1

Information technology (IT) firms are set to announce corporate results for the June quarter (Q1) from next week. Tata Consultancy Services (TCS) and HCL Technologies will report Q1 results on July 12, while Wipro will announce its results on July 13, and LTIMindtree on July 17. Infosys will report its earnings on July 20.  

Market watchers believe the IT sector could have a muted Q1, impacted by a slower deal pipeline conversion leading to an impact on volumes in a seasonally strong quarter. In addition to this, the demand environment in the US has not shown any signs of improvement and Europe appears to be relatively stable.

“Most IT companies under our coverage are expected to report muted Q1 results despite Q1 being a seasonally strong quarter given the continuity of weak macros,” Sharekhan said.

According to HDFC Securities, industry checks and high-frequency indicators point to no change in the demand environment in the last two months even as vertical-specific variability is likely to continue. Accenture’s recent commentary also indicates that higher discretionary/consulting segments impact the soft demand environment.

An assessment by the brokerage further highlighted that the sequential revenue growth is expected to be flat for the sector with tier-1 IT ranging from -2.4 per cent constant currency (CC) QoQ to per cent 1 per cent QoQ CC.

“Within tier-1 IT, sequential growth will be led by HCL Tech and LTIM, while Wipro and Tech Mahindra are expected to decline sequentially. Infosys and TCS are expected to post flat sequential performances and we expect Infosys to reduce the upper end of its FY24 growth guidance (from 4-7 per cent to 4-6 per cent). Wipro is expected to guide 0-2 per cent QoQ for Q2FY24E and HCLT is expected to maintain its growth guidance for FY24,” HDFC Securities said.

It further added that mid-tier IT growth premium is expected to continue with sequential growth performance led by Tata Elxsi and Persistent Systems. The laggard in mid-tier IT will be Mphasis with an expectation of a sequential decline.

With a gain of 4.26 per cent, the Nifty IT index has underperformed the benchmark Nifty50 index (up 7.14 per cent) on a year-to-date basis. On the other hand, the IT index has fallen nearly 23 per cent since January 2022, while the Nifty50 index has gained around 12 per cent during the same period.

Meanwhile, valuations of the Nifty IT index have also fallen lower than its five-year average. Consider this: the price-to-earnings ratio of Nifty IT was at 22.60 times on July 5, 2023 against its five-year average of 26.25 times.

“Current underperformance of IT service companies largely factors the prevailing macro-overhang. We believe the relative underperformance is likely to persist as near-term uncertainty owing to deteriorating macros is expected to continue further beyond H2FY24 as signs of gradual recovery are failing to show up. Further apprehensions are likely to continue to weigh on the covered IT service companies in the near term and restrict any material outperformance. We continue to advocate a neutral rating on the sector,” Sharekhan said. Infosys, HCL Technologies, Persistent and Coforge are among the preferred picks of the brokerage.

Considering the present market conditions, HDFC Securities maintained a selective stance on the sector with a preference for LTIMindtree within tier-1 IT and Persistent Systems within mid-tier IT, which remain attractive on a PEG basis.  

A projection by HDFC Securities further showed that adjusted profit after tax of TCS, HCL Technologies and Wipro may decline 3.8 per cent, 5.3 per cent and 10.1 per cent QoQ. On the other hand, Infosys may report a 2.3 per cent growth in adjusted profit after tax on a QoQ basis.

Sharekhan expects that QoQ CC revenue growth of -1.9 per cent to 1.2 per cent for Tier-1 and 0.7 per cent to 3 per cent for Tier-2 Indian IT service companies.

“The depreciation of USD against EUR and GBP is expected to provide cross-currency tailwinds and assist in marginally elevating the dollar-reported revenues of the IT service companies. EBIT margins are expected to be impacted by wage hikes and weak revenue growth, especially for Tier 1 IT service companies. The IT service companies continue to face challenges owing to a slowdown in discretionary spending and weaknesses in BFSI, Communication, and Hi-Tech verticals,” Sharekhan said.

Watch: India tour of West Indies: Ajit Agarkar-led selection panel rests Rohit, Kohli for T20 series, gives a chance to Tilak Verma, snubs Rinku Singh

Watch: 'Oo Antava'-fame Samantha to soon appear in 'Kushi' with Vijay Deverakonda; hints at taking a break from acting after ‘Citadel’

Watch: Kanwariyas dancing in Delhi Metro, watch viral video; know importance of Saawan, Kanwar Yatra

Watch: MS Dhoni as Roger Federer, Ravindra Jadeja as Rafael Nadal, Shivam Dube as Novak Djokovic; CSK's reply to Wimbledon on calling Federer as Thalaiva

Watch: AI images for Friends characters Monica, Chandler, Rachel, Ross, Phoebe played by Courtney Cox, Jennifer Aniston, Matthew Perry and others in ethnic wear attending Indian wedding

Also read: CLSA's India Bull-Bear index shows 96% bullish reading for market

Also read: Hot stocks on July 6, 2023: JBM Auto, Reliance Power, YES Bank, Suzlon Energy and more