Q3 Preview: Earnings of IT cos seen soft, but Street’s focus to be on demand view

The likely softness in the December quarter earnings of Indian information technology companies is a given due to the seasonality factor caused by furloughs and year-end holidays.

This expected softness in the earnings is also largely priced into the shares of the companies.

Therefore, more than the quarterly results, the Street’s eye will be glued to the commentary on demand that the software majors offer and any potential tweak to the growth guidance.

Most economists have pencilled in a recession in the US and Europe into their growth estimates for 2023.

That the pain points are gradually visible was hinted by sector major HCL Technologies, when the company last month, trimmed its revenue growth aim for the current financial year.

The company said that the revenue growth for 2022-23 (April-March) will be at the lower end of the guided range of 13.5-14.5%. This came after HCL Tech raised its FY23 growth guidance post the September quarter earnings to 13.5-14.5% from 12-14%.

Last month, US tech major Accenture Plc also signalled a slowdown in discretionary spending and did not increase its FY23 revenue guidance.

The weakening macroeconomic environment in the US and Europe – two major markets for IT firms – have not had a major impact on deal pipeline in the last quarter, but investors would want to see how it shapes up for the ensuing quarters.

“While we believe near-term revenue growth outlook (FY23F) for the sector remains strong, uncertainties have increased significantly for the FY24F growth outlook. We still see downside risks to the consensus revenue growth forecasts for FY24,” Nomura Financial Advisory and Securities said in a report.

Brokerage Motilal Oswal Securities expects companies under its coverage to report a cumulative 1.9% sequential growth in revenue for the last quarter, and a 9.1% YoY increase in constant currency terms.

The growth in operating profit and net profit is pegged at 5.9% and 7.2% QoQ, respectively. This will be partly aided by the depreciation of the rupee against the dollar, although the positive impact will be offset by the softness in revenue growth and continued supply-side pressures, the brokerage said.

In the midcap space, brokerage Nomura expects the strongest growth in earnings from Persistent Systems at 3.6%, and the weakest from Mphasis at 0.4% in constant currency terms.

Brokerage Emkay Global Financial Services expects Infosys and HCL Tech to retain their revenue growth guidance for FY23. It expects Wipro to guide for 1-3% sequential revenue growth for January-March in constant currency terms.

Infosys had guided for 15-16% constant currency YoY revenue growth and margins to be in the 21-22% band.

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