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- IT companies are expected to see contracted revenues, slow deal conversions, soft demand and impact of furloughs in Q3.
- Infosys and Wipro might see a sharper impact on revenues and margins due to wage hikes during the quarter.
- TCS is mostly expected to see flat to slight growth thanks to large deal ramp-ups including BSNL deal.
The tide might have turned for IT stocks as investors found them in favour again. However, the third quarter show of top companies might continue to see contracted revenues, slow deal conversions and soft demand.
The quarter is traditionally high on furloughs or temporary halt in works, but this year its impact seems deeper than ever. With the exception of HCL Tech which the street expects to post anywhere over 4% growth on constant currency revenues, most others will see either a flat or decline.
Infosys and Wipro might see a sharper impact on revenues and margins due to wage hikes during the quarter. TCS is mostly expected to see flat to slight growth thanks to large deal rampups including BSNL deal.
“A seasonally weak quarter may be marred not only higher than historical furloughs (for most players) on the revenue front but also on the margin front due to the impact of postponed salary increases,” says Girish Pai, analyst at Nirmal Bang in his preview.
With favourable currency headwinds, the margin picture might be hazy only for companies that have given our wage hikes. “Margins are likely to remain stable as supply-side dynamics have reversed with attrition bottoming out,” says a report Nuvama.
Q3 constant currency revenue growth predictions (QoQ)
| Jefferies | IDBI Capital | Nuvama | Nirmal Bang | |
| TCS | 1.5% | 0% | 0.5% | 0% |
| Infosys | – 1.4% | -1.2% | -1.4% | -1% |
| Wipro | -2.5% | -2.5% | -2.9% | -3% |
| HCL Tech | 6% | 3.9% | 4.6% | 4% |
| TechM | -1.6% | -1.1% | -1% | -2.2% |
| LTIMindtree | 1.5% | 1% | 1.4% | 1.5% |
Source: Brokerage reports
Slicing it thin
Mid-tier companies are expected to perform better than their larger peers. But this quarter, they too might join the biggies to slice down revenue growth targets for the fiscal year.
“We expect Infosys to taper top end guidance from 1-2.5% to 1-2%. We expect Wipro to guide -1 to 1% QoQ revenue guidance for Q4FY24E. We expect Cyient to lower guidance range from 15-20% to 14-16%. We expect Coforge to narrow the guidance range from 13%-16% to 13-14%,” said a report IDBI Capital.
Most companies are expected to be tight-lipped about deal commentary and more due to volatile demand conditions. However, that leaves brokerages with more questions about the outlook on the sector.
Compression in the book?
The key things to watch out for this quarter would be the pace of conversion of total contract value (TCV) into revenue, compression in the existing book, and the state of discretionary spending.
With TCS, the market will watch out for any strategic changes under its new CEO. Infosys is expected to provide commentary on its CFO’s exit as well as the loss of a large $1 billion deal.
Until last quarter, a few brokerages had been confident that the strong deal wins seen earlier in the financial year might translate in FY25. Now, they’re unsure.
“We have a non-consensus view that FY25 growth will not be as strong and therefore have cut our FY25 estimates in September 2023. Our target multiples are lower as we believe there is downside to not only the consensus estimates for FY25, but also to our own. Our revenue growth estimates for FY25 may seem too aggressive for the underlying macro assumption of a shallow recession in the US in 2024,” said Nirmal Bang.
The IT sector has been facing the worst of the slowdown this year, but the recent outperformance during the market rally might make it tough for the markets to gulp down a weak earnings performance.