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Business News/ Industry / Infotech/  Q2 results review: Major players report soft earnings; what's the road ahead for IT sector?
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Q2 results review: Major players report soft earnings; what's the road ahead for IT sector?

IT Q2 results: Experts are not very optimistic about the near-term prospects of the Indian IT players because of the prevailing macroeconomic uncertainty in the US and Europe.

The near-term outlook of the Indian IT sector appears gloomy. (REUTERS)Premium
The near-term outlook of the Indian IT sector appears gloomy. (REUTERS)

Q2 results: Major Indian IT companies, including TCS, Infosys, HCL Tech and Wipro have reported subdued earnings for the July-September quarter (Q2) due to the impact of ongoing macroeconomic uncertainties, which have resulted in reduced discretionary spending in critical markets.

The near-future prospects also seem unfavourable, as the US Federal Reserve is committed to reducing inflation to its 2 per cent target. To achieve this, the central bank is expected to maintain high-interest rates for an extended duration and may even implement further rate hikes, which could place additional pressure on the economy.

Major IT players' Q2 earnings

TCS reported a rise of 8.7 per cent in consolidated net profit at 11,342 crore in the September quarter, compared to 10,431 crore in the corresponding period last year.

India's second-largest IT major Infosys' net profit rose 3.17 per cent to 6,212 crore, compared to 6,012 crore in the corresponding period last year. The Bengaluru-based company trimmed its revenue growth guidance for the full year at the upper end to 1-2.5 per cent.

HCL Tech reported a rise of 9.8 per cent in its consolidated net profit at 3,832 crore, compared to 3,489 crore in the corresponding period last year.

Wipro reported a consolidated net profit of 2,667.3 crore in the July-September quarter, compared to 2,649 crore in the year-ago period.

Wipro's quarterly dollar revenue fell 2.3 per cent sequentially in the September quarter, marking the third straight such decline for the fourth-largest Indian IT services firm.

Also Read: IT jobs bleak in near-term after headcount crashes by 16,162 in top 3 companies; What's weighing on the sector?

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The road ahead

Experts are not very optimistic about the near-term prospects of the Indian IT players because of the prevailing macroeconomic uncertainty in the US and Europe. The Israel-Hamas war has also raised fresh concerns. If the war spreads to other countries, it will deal a serious blow to the fight against inflation and hit the global economy hard.

Sandeep Gogia, Managing Director - Investment Banking at Equirus said the near term is likely to be soft for the IT sector given furloughs in Q3 (with LTIMindtree first one to say higher than normal furloughs) and no expectation of most companies' management regarding the calendar year 2023 (CY23) budget flush.

Gogia added that the new geopolitical issues emerging from Israel may keep global clients conservative in the near term in terms of their IT spending. These factors are implied from many companies' growth outlook for the second half of the financial year (2HFY24E).

"It all depends on how CY24E IT budgets pan out, clarity on which will emerge in the next three to four months and investors need clarity on the macro outlook from the US and Europe," said Gogia.

"From the US mixed signals coming - some are indicating a soft landing some are indicating a hard landing on GDP. If soft landing and bond yield in the US come down then the sector will see a rebound in growth in FY25E which is built into consensus estimates, but any downgrades in FY25E growth rates on base of slow growth in FY24E can lead to some further downside in the sector," Gogia said.

Aditya Gaggar, Director of Progressive Shares believes that the earliest signs of recovery would only be visible from Q4FY24 or Q1FY25 onwards.

He said there has been anticipation of a recovery in the coming quarters for the sector but it definitely remains a wait-and-watch, as macro conditions maintain the volatility.

"There has been an uptick in the order inflow seen over the past two to three months across the IT companies but a slowdown in the project-based business is hampering the overall industry growth," said Gaggar.

However, Siddhesh Mehta, a research analyst at SAMCO Securities is positive about the IT sector.

Mehta pointed out that some IT firms have achieved reduced attrition rates, thereby enhancing knowledge retention and cost efficiency. Additionally, securing multi-billion dollar IT deals strengthens revenue outlook.

Mehta further said that the historical analysis of Nifty IT indicates its strong performance in the latter half of the calendar year in seven out of the last 10 years.

Considering these factors, Mehta believes major IT firms may outperform for the remainder of the year.

"Post Q2FY24 results, major IT firms have faced share price declines. We advise our investors to capitalize on valuation declines and add major IT stocks to their portfolios for the long term," said Mehta.

Also Read: IT sector still a good bet after lacklustre earnings? Here's what experts say

Read all market-related news here

Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.

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Published: 21 Oct 2023, 10:55 AM IST
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