BackEarnings preview: Indian IT firms to report soft numbers in Q2FY24; revenue, profit likely to be muted
Indian IT firms are likely to report softer Q2FY24 numbers due to headwinds in key markets, leading to a decline in EBIT margin on a YoY basis. Q2FY24 numbers may be better than last quarter but may still fail to meet expectations.
PremiumIndian IT players are likely to report a softer set of numbers for the second quarter of the current financial year (Q2FY24) due to prevailing headwinds in the key markets. Experts expect a marginal decline in the IT firms' EBIT margin on a year-on-year (YoY) basis as the cut in discretionary programs, the growth slowdown and the increase in costs such as travel and back-to-office expenses dent profitability.
Even though the Q2FY24 numbers of the Indian IT firms may be better than the last quarter to some extent, they may still fail to meet the expectations envisaged at the beginning of the year.
"Hopes of finding a bottom in the first half of the year have not materialised, we believe, as project ramp downs, cancellations continue. We expect large-cap IT services players to report a modest (1 per cent) to 1 per cent+ constant currency (CC) QoQ (quarter-on-quarter) growth in Q2," said brokerage firm JM Financial.
The brokerage firm expects Infosys and TCS to be at the upper end while Tech Mahindra, still impacted by project ramp-downs towards the first quarter-end, to be at the bottom end of the band. Mid-caps under coverage will fare relatively better. Large deal wins, though positive, are unlikely to contribute meaningfully to FY24 revenues, JM Financial said.
JM Financial expects guidance cut by both HCL Tech (4-6 per cent from 6-8 per cent) and Coforge (12-14 per cent from 13-16 per cent).
"Barring players who gave wage hikes in Q2 (LTIMindtree, Persistent Systems), sharper cost focus will drive modest margin expansion for most. We expect commentary to remain circumspect quelling any hope of a recovery in the second half. A plateau, instead of a rebound, is more likely. Near-term stock performance should mirror that (side-ways movement)," said JM Financial.
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Brokerage firm Motilal Oswal Financial Services expects growth of the IT services industry to remain weak in Q2FY24, as macroeconomic uncertainty continues to weigh on discretionary spending.
"While the industry has witnessed an uptick in order inflow over the past two months with a focus on cost efficiency, the slowdown in project-based business is expected to hamper overall industry growth, even though Q2 is traditionally a robust season for the sector," Motilal Oswal said.
The brokerage firm expects the IT services companies under its coverage to report a median revenue growth of 1.5 per cent QoQ and 5.7 per cent YoY in Q2FY24.
Motilal Oswal underscored that this growth rate is among the slowest observed over the last decade, despite a marginal impact from forex fluctuations. However, a focus on cost-control (led by deferrals in wage hikes) measures should lead to margin improvement in Q2, and help the industry deliver 3.7 per cent QoQ growth in EBIT and a 4.1 per cent QoQ growth in PAT.
Motilal Oswal expects the revenue growth of tier-I companies to be in the range of -1.2 per cent to +3.6 per cent QoQ CC. Revenue of tier-II players is expected to grow to the tune of +0.4 per cent to +3.2 per cent QoQ in CC terms.
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Kotak Institutional Equities forecast muted revenue growth of (-)0.6-0.8 per cent for tier-1 IT in a seasonally strong quarter.
EBIT margin will decline marginally YoY with the quarterly movement influenced by the wage revision cycle. Kotak expects muted revenue growth for mid-tier, including ERD names. The brokerage firm expects strong, and in some cases, record deal TCVs that will set the platform for FY2025E.
"We expect sharp EPS (earnings per share) cuts in Tech Mahindra, moderate ones in others (1-3 per cent) and a negligible cut for Infosys. No change in company guidance, except a marginal cut for HCL Tech. We retain a constructive view on Infosys, HCL Tech and Cyient," Kotak said.
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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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