IT Q2FY24 preview: Barring HCL Tech, Tier-1 players to report muted nos; Infy likely to maintain guidance
Owing to the likely soft Q2 and only a modest improvement in the second half, there is an expectation of a guidance cut or moderation in outlook for most players, except Infosys, noted JM Financial.
In yet another seasonally strong quarter, the revenue growth of IT services companies is seen to take a hit in the Q2 period amid continued macro uncertainty and a slowdown in discretionary spending. Further, even as players within the space continue to witness significant deal wins, the annual contract value (ACV) continues to remain lower despite the high total contract value (TCV) owing to longer-tenured deals, pricing, and the transition effect.
Here are the key points to note:
Revenue outlook: Growth across Tier-I Indian software exporters is seen to remain muted, with the only exception being HCL Technologies. “Among mid-caps, we expect Birlasoft (3% QoQ growth on an adjusted basis) and Newgen (30% YoY growth) to lead the pack. While TechM, Wipro, Cyient, and Zensar are expected to report subdued numbers. In terms of guidance, we expect Infosys to maintain its guidance of 1-3.5 per cent. We expect Wipro to guide -1 to 1 per cent QoQ revenue guidance for Q3FY24E," said IDBI Capital in its earnings preview report.
"The deceleration witnessed in March and April has eased. But a still weak spending environment and sporadic instances of project ramp-downs will likely cap any growth acceleration, in our view,” notes JM Financial.
Margins Outlook: IDBI Capital maintains that margins will differ across IT companies. The brokerage expects TCS, HCL Technologies, Infosys, and Coforge to see margin expansion. On the contrary, Zensar and LTIMindtree are seen to log a decline in margins due to wage hikes. Newgen Technologies, on the other hand, is likely to report strong margins both on a quarter-on-quarter (QoQ) and year-on-year (YoY) basis. Furthermore, Birlasoft is seen to post flat margins.
JM Financial expects the top 4 players to report a (10)–50 basis point (bps) EBIT margin expansion QoQ. For Tech Mahindra, it expects margins to remain flat despite the reversal of wage cuts for senior management. On the other hand, LTIMindtree and Persistent Systems are expected to see margin contraction on the back of wage hikes, while Coforge is seen to log improvement in margins by 150 bps.
Deal wins: JM Financial, in its preview report, said that large-cap IT services players have won a fair share of efficiency-led mega deals. “INFO appears to have taken a lead in 2Q, with at least three mega deals (TCV of c.USD 6bn) already announced. TCS’ deal-win momentum has sustained, e.g., the USD 1 billion JLR deal. HCL announced a USD 2.1 billion deal with Telecom. TECHM appears to be the only exception. We believe TECHM’s excessive focus on margins is currently hindering its ability to bid aggressively. While that might aid margins in the near term, it might impact FY25 growth adversely as efficiency-led deals seem to be the only game in town right now,” it adds.
Other key monitorable
Ramp-up and, hence, revenue conversion for mega deals have been in focus for a long time. Owing to the likely soft Q2 and only a modest improvement in the second half, there is an expectation of a guidance cut or moderation in the outlook for most players, except Infosys, noted JM Financial.
“Investors should also look for any signs of a possible budget flush and indications of a higher or lower impact of furloughs in 3Q,” the brokerage firm adds.
The deal trend in the Q2 period should also be watched out, as it will give the trajectory for H2FY24E and FY25E, notes IDBI Capital.
Get Latest Business News, Stock Market Updates and Videos; Check your tax outgo through Income Tax Calculator and save money through our Personal Finance coverage. Check Business Breaking News Live on Zee Business Twitter and Facebook. Subscribe on YouTube.
RECOMMENDED STORIES
From 19,000 Monthly SIP to Rs 13 cr Retirement Corpus: How many years will it take to reach this target; by what age can one achieve this goal
Power of Compounding: Rule of 114; how much return you will get on Rs 2 lakh investment in 2, 5 and 8 years? See calculations
'Diwali Offer' Stocks by Anil Singhvi: These 2 largecap, 1 smallcap scrips can give up to 70% return - Check targets
05:53 PM IST