TCS, Infosys to announce Q4 results next week; here’ what to expect from IT sector

Information technology majors Tata Consultancy Services and Infosys are slated to announce their March quarter results next week. There are expectations that the sector may report tepid numbers due to unfavourable macro conditions and the recent banking crisis in the US and Europe which led to slowdown of tech spending by enterprises globally.

With a gain of 0.27 per cent, Nifty IT index outpace the NSE Nifty index (down 4.12 per cent) in Q4FY23. Shares of Persistent Systems in the Nifty IT index gained the most 19.08 per cent on a year-to-date basis till March 31. LTIMindtree, Tech Mahindra and HCL Technologies also gained somewhere between 4 per cent and 10 per cent. On the other hand, Mphasis, L&T Technology Services, Wipro, Infosys and TCS declined between 1 per cent and 9 per cent.

“The outperformance in the March quarter came on the back of DM macro holding up better than expected, indications of no material deterioration in demand pipeline with the US market continuing to be relatively strong--this is before the banking problems in March’23 and correction of valuation from Oct’21 levels,” Nirmal Bang Securities said in a report.

Going ahead, IDBI Capital Markets believes that enterprises will shift their focus on cutting costs resulting in higher cost take-out deals, vendor consolidation and lower discretionary spending. BFSI, telecom, retail and hi-tech verticals are expected to be impacted by the slowdown, thus weakening the H1FY24 growth outlook.

“We expect even those verticals not impacted will have a cautious outlook. For Q4FY23, we expect large caps to register dollar growth of -1 per cent to +1 per cent QoQ in constant currency (CC) terms aided by 15-100 basis points (bps) cross-currency tailwind. Among midcaps we expect revenue growth of -1 per cent-3.5 per cent QoQ in CC aided by 30-150 bps cross currency,” IDBI Capital Markets said adding it prefers Infosys (target price: Rs 1,715) among large caps and Coforge (target price: Rs 4,356) among midcaps.

In terms of revenue growth, IDBI Capital Markets believes that TCS to lead the pack with 1 per cent QoQ growth among tier 1 players, while Infosys, Wipro and Tech Mahindra are expected to register flat revenue growth QoQ. HCL is expected to register -1 per cent QoQ growth. Among midcaps, it expects Coforge (3.5 per cent CC QoQ growth, up 166 bps margins) and LTIMindtree (2.6 per cent QoQ, up 221 bps margin) to lead the pack.

“We expect Cyient services revenue to register 1.5 per cent QoQ organic growth in CC. While Zensar is expected to register flattish growth, Birlasoft is expected to de-grow -1 per cent QoQ in CC. In the smallcap space, Newgen is expected to record 10.3 per cent QoQ growth in a seasonally strong quarter,” IDBI Capital Markets said.

On the other hand, Nirmal Bang Securities sees revenue growth of 0.9 per cent QoQ on CC basis for TCS, backed by strong order inflow of the last 12 months (consisting of large and mid-sized deals). It is likely to face a cross-currency tailwind of 175 bps on a QoQ basis. “For Q4FY23, we think that EBIT margin will expand by 40 bps QoQ, driven largely by very controlled hiring, higher utilisation, pyramid rationalisation and lower subcon costs. This will be offset somewhat by aggressively normalising travel and S&M expenses,” Nirmal Bang Securities said adding Infosys’ revenue to increase by 1.6 per cent QoQ in CC terms and expect a cross-currency tailwind of around 150 bps.

IDBI Capital Markets has a ‘Hold’ rating on TCS with a target price of Rs 3,615. On the other hand, it holds a ‘Buy’ call on Newgen and Birlasoft with a target of Rs 315 and Rs 1,045, respectively.

Sharing its views on the margin outlook, IDBI Capital Markets believes that easing of supply-side challenges, lower attrition and cost rationalisation will boost margins. Large caps (except HCL) are expected to report 24-90 bps improvement and midcaps (except Birlasoft) are expected to register margin expansion in the range of 60-221 bps QoQ.

Overall, the IT sector witnessed heavy selling pressure in the financial year 2023 due to fears of a recession in developed markets (DM) over the next 6-12 months on account of stronger and swifter monetary tightening by central banks, especially by the US Federal Reserve, concerns emerging around demand in FY24, especially amid adverse comments by IT ecosystem players, including those in software and hardware.

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