TCS, Infosys, HCL Tech: Key trends and takeaways from Q2 results of these IT blue-chips

Three IT majors, Tata Consultancy Services (TCS), Infosys and HCL Technologies, have announced their earnings for the period ended September 30, 2023. The top three IT blue-chips have posted a mixed bag of numbers but guidance and commentary remain on the pessimistic side. However, some green shoots in terms of margins and cost-realizations were seen.

A host of midcap and smallcap IT players including L&T Technology Services, Tata Elxsi, Zensar Technologies, Happiest Minds Technologies and Newgen Software Technologies are lined up with their quarterly earnings due later in the day. Investors will be looking at their earnings, commentary, outlook and guidance for the future roadmap.

Kotak Institutional Equities has picked up three-themes from the results of IT-biggies so far. It said that the companies have finally bitten the bullet and gone for aggressive cost rationalization, many mega-deals closed; and the visibility of an improvement in discretionary spending is still bleak but necessary to support FY2025E consensus growth estimates.

IT companies are a lot more aggressive in controlling costs compared to the beginning of the year stance, where hopes of a back-ended recovery meant that companies were okay with carrying a few inefficiencies, it said. "The companies have adequate levers to improve margins over the medium term. We build in 60-110 bps margin expansion over FY2024-26E for TCS, Infosys and HCL Tech."

TCS, Infosys and HCL Tech posted record-high TCV of deal wins, aided by strong flow of mega deals, driven mainly by cost optimization initiatives of clients. The pick-up in deal wins augurs well for revenue growth in FY2025E.

Information Services Group (ISG) Q3CY23 deal flow data depicts ongoing strength in traditional deals were at highest-ever levels, whereas XaaS (anything as a service) continued to slip. The total deal flow number is muted at 3.3 per cent YoY, dragged by APAC yet again, said Nuvama Institutional Equities.

While ISG is seeing uncertainty in decision-making affecting the overall deal momentum, it also views clients as more receptive to managed services deals that feature cost optimization, efficiency gains and vendor consolidation. The US remains weak whereas Europe is holding strong, particularly the UK, it said.

Kotak expects the scope for large cost take-out deals to increase. "The pipeline continues to remain healthy despite record TCV
conversion. Cost optimization deals are common in a challenging environment. The tenures of such deals are longer, as vendors seek to cover upfront investments in deals, especially if they involve rebadging," it said.

"Cancellations, delays and reprioritization continue to impact discretionary spending. These challenges that started emanating in the March 2023 quarter continue even now. We expected the pace of discretionary spending pullback to moderate, but this did not play out as visible from the results," Kotak added, picking HCL Tech and Infosys as its preferred picks.

Julius Bar remains constructive on TCS’ longer-term prospects, given its ability to structure large multi-service and complex deals, strong execution capabilities, healthy client relationships, deal wins across verticals, and strong FCF generation. It maintains hold with a target of Rs 3,800. Emkay Global has the same rating on the counter with a target price of Rs 3,550.

After the Q2 results, Motilal Oswal has reiterated its buy rating on Infosys with a target price of Rs 1,660, while Bonanza Portfolio and IDBI Capital have a hold rating on the stock with a target price of Rs 1,570 and Rs 1,440, respectively. Axis Securities has suggested to 'sell' Infosys with a target price of Rs 1,300.

BNP Paribas trimmed its FY24E revenue growth slightly below the guidance range. However, its FY25-26E EPS is largely unchanged as we see a strong FY24 exit positioning HCL Technologies well for a solid performance in FY25. It retained a buy with a target price of Rs 1,410. IDBI Capital has suggested to hold the counter with a target price of Rs 1,165.

Disclaimer: Business Today provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.

Also read: Hot stocks on October 17, 2023: Grasim, RVNL, Cyient DLM, VA Tech Wabag, IRFC and more

Also read: MRPL, IRCON, IRFC, Vakrangee, Suzlon Energy shares jump up to 12% amid high volumes on NSE