Tech Q1 results: Below-par earnings likely amid Infosys exits, market uncertainty

The earnings (quarterly results) season will kickstart with the announcement of the TCS, followed by Infosys’s first quarter (April-June, 2023) results.

According to Sumit Jain and Aditi Patil, analysts with brokerage firm ICICI Securities, based on discussions with IT companies and Accenture’s August quarter guidance, the June quarter might underperform compared to current expectations.

Six top-level exits from Infosys since October 2022 have raised concern among investors about the near-term impact on the second-largest domestic IT services company.

According to earlier in-the-field evaluations, this matter becomes especially relevant as the tech industry’s demand for delivery-related roles surges.

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Positive and negative indicators

However, positive signs indicate that tech spending will remain strong in the mid to long term. “We anticipate a rebound in the second half of FY24 due to encouraging guidance from global SaaS (Software as a service: Software as a service is a software licensing and delivery model in which software is licensed on a subscription basis and is centrally hosted) players, stable deal pipelines, and a recent increase in demand noted by ISG, a global technology research and advisory firm.

Positive indicators include global GDP growth, which suggests a demand revival in 2024/2025 after a dip in 2023. Large US banks and retailers are committed to long-term tech transformations despite some macro uncertainties. Guidance from global SaaS companies and most Indian IT services companies hint at a demand recovery from H2FY24.

Negative indicators include soft guidance from IT companies like Infosys and Wipro for Q1FY24, no sequential improvement implied by Accenture’s August quarter guidance, and near-term weakness in demand indicated by declining headcount and other factors.

Jain and Patil, in their note to investors, pointed out that the IT sector’s current valuations are not appealing, with possible further downside due to weak earnings growth.

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Top picks

Our top picks are Infosys, Persistent, and TCS, while TechM is our least favourite. The note said the risks include the unknown impact of Generative AI on contract pricing and margins, high inflation, interest rates, and pricing pressure due to competitive cost optimisation deals.

Despite slowing decision-making cycles, companies like TCS and Wipro reported healthy growth while deal pipelines remained stable. Discretionary spending has been postponed, but demand for cost optimisation and digital transformation deals remains robust.

Infosys deal pipeline is seeing traction in automation, cost efficiency, and vendor consolidation programmes, with a healthy mega deal pipeline in advanced stages.

Infosys exits raise concern

There have been six top-level exits from Infosys since October 2022, raising concerns regarding increased leadership turnover in the second-largest domestic IT services company.

The recent departure of Narsimha Mannepalli and Vishal Salvi, two senior executives at Infosys with significant roles in delivery, has brought about a renewal of investor concerns following the earlier exits of co-presidents Ravi Kumar and Mohit Joshi within the past three quarters.

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An analyst with a brokerage firm, Motilal Oswal, said, “At the same time, this issue can be perceived as a manageable risk; a potential supply-demand gap in project management could negatively impact short-term project timelines. Despite the current turbulence, our stance on Infosys remains optimistic due to the preservation of its structural growth prospects.”

The recent report on the departure of two senior leaders, Mannepalli (EVP, Head of Cloud & Infrastructure Solutions, and Head of Hyderabad delivery centre) and Salvi (CISO, also responsible for the Cyber Security business delivery) from Infosys, has stirred questions about leadership stability in the company, particularly because Infosys recently lost both of its co-presidents.

This is compounded by the high demand for delivery-side leadership roles in the IT Services sector.

“We interpret these departures as posing a near-term risk for Infosys, especially considering the current challenging macro environment, which could affect delivery in the near future,” the analysts at the brokerage firm said in a note to the investors.

Though the immediate demand for IT services remains weak, the long-term market remains steady, suggesting a potential rebound for IT services companies once the macro environment becomes more stable. Despite this, Infosys’s recent leadership changes pose a near-term risk that could potentially affect its delivery capabilities.

Infosys’s weaker 4QFY23 results and continued impact into 1HFY24 have caused the stock to drop considerably (over 30 per cent from its peak).