IT sector Q2 results: Infosys, HCL, TCS, others may see unexpected turns

Unlike most second-quarter results which throw up robust growth for the IT services industry, the second quarter of FY 2023-24 (Q2 FY24) is expected to witness some unexpected turns.

Traditionally, this quarter has been a period of robust growth for the industry. However, this year's projections hint at a more tempered outlook. While Tier-1 IT firms anticipate growth rates oscillating between -1.4 per cent and +2.2 per cent, the mid-tier segment is slightly more bullish, forecasting a growth span of +0.9 per cent to 3.8 per cent.

At first glance, the recent stagnation in the IT sector might seem uneventful, with little change over the past few months. Demand indicators have dipped by 10-15 per cent since the start of the year. However, this masks the underlying currents: positive supply-side factors that keep the ship steady and ensure operational resilience even when growth rates appear muted.

“Some negative surprises are likely in store, and another consensus earnings downgrade is on the cards after two successive quarters. We believe the market has not priced that in or is looking beyond the near-term pain,” brokerage firm Nirmal Bang said in its note to investors.

Quarterly nuances

Analysts anticipate HCL Tech to lead the charge with a 2.2 per cent QoQ growth in the Tier-1 category, while other giants like TCS, Infosys and Wipro have their predictions pegged at +1.6 per cent, +1 per cent and -1 per cent respectively. Mid-tier contenders Sonata Software and Persistent Systems are poised for a favourable run, but it might be a slower pace for Zensar.

Infosys's ambitious revenue growth target of 1-3.5 per cent constant currency (current period's revenue earned in foreign currencies converted at the previous period's exchange rates) for FY24 (estimate) and HCL Technologies aiming for the 6-8 per cent mark demonstrate industry optimism. On the other hand, companies are palpably cautious, with concerns around project budgets and extended deal closures.

Deal bookings continue to be robust, with key players bagging significant contracts. The focus is clear: cost-saving and consolidation. The sector's growth avenues are expanding with the increased adoption of AI and an emphasis on cloud migration.

What analysts say

“While Accenture recently reported a soft quarter in its managed services deals bookings, indicative of extended weakness, booking velocity has been stronger in Indian IT,”, HDFC Securities said in a note to its investors.

“Deal bookings in the sector have been robust, with several mega deals centring around cost optimisation and consolidation. Key large deals included (1) JLR, Georgia Department of Labour deals by TCS; (2) Liberty Global, Danske deals by Infosys; and (3) Verizon, Siemens and ANZ deals by HCL Tech,” it said.

“AI spending and adoption are expected to accelerate and supplement growth, even as cloud migration and application modernisation will be large medium-term spend imperatives. We see greater competition in deals (subpar margins in mega deals), following several senior-level leadership changes in the sector,” the note said.

Though valuation multiples have surged by 10 per cent over the recent quarter, it’s essential to approach the sector with balanced optimism. With projections of a sector-wide revenue growth rebound to around 9 per cent in FY25E from 4 per cent in FY24E, there's potential for gain.

“The IT sector is in a phase of cautious optimism driven by innovation and adaptability,” HDFC Securities said.

What to watch out for

Here is what one should watch out for when the tech firms post their results:

Revenue from contract value: The speed businesses convert their total contract value to revenue indicates operational efficiency. Is this a testament to their adaptability or reflects the market's volatility?

Business compression: When we see shifts in existing businesses, it prompts the question: are we witnessing a market contraction or just businesses pivoting to new strategies?

Discretionary spending: Optional spending often acts as a barometer for business confidence. The current state of this spending hints at the underlying sentiment of an organisation about the near future.

Budget dynamics in Q3 FY24: A potential budget surge might be on the horizon, but the looming shadow of extended holidays might dampen this optimism. Will businesses forge ahead or play it safe?

Demand in 2024: As we edge closer to 2024, all eyes are on the demand trajectory. Are we gearing up for a boom or a slump if the present is any indicator?

Key sectors

Diverse demands: The diverse sectors of banking, technology, manufacturing and telecom are each charting their unique courses. Yet, how they fare will have ripple effects across the industry.

Deal dynamics: One wonders if this pace is sustainable after a quarter teeming with mega-deals. Is this the new normal or a fleeting peak?

Embracing advanced AI: As AI becomes more embedded in operations, its tangible impacts, especially productivity, are keenly awaited. Is this the productivity revolution we've been waiting for?

Companies making waves

Pay raise delays: Infosys and Wipro's decision to defer announcements regarding employee pay raises is intriguing. Are they being cautious, or is there a bigger strategy at play?

Guidance updates: While major changes in guidance for top-tier companies seem unlikely, the subtle shifts in Tier-2 entities might be the dark horses to watch.

Tier-1 entities

Top-tier companies are under the microscope, from Infosys's growth trajectory to HCLT's ambitious yearly revenue targets and TCS's new workplace norms. Wipro's unique challenges and Tech M's leadership changes further intensify the spotlight.