IT cos stave off earnings downgrade challenge
In NEW DELHI: Despite the fact that macro headwinds were predicted to remain severe, the majority of information technology (IT) services majors shown resilience in the present climate.
Infosys Ltd., Tata Consultancy Services Ltd. (TCS), and HCL Technologies Ltd. all outperformed the majority of expert predictions for the September quarter.
Though cross-currency headwinds are still present, constant currency growth remained robust.
In spite of recessionary fears, deal closures and order flows were strong, enhancing the outlook for businesses in the second half of FY23.
“Thus far, the IT industry has contributed to a strong start to this quarter’s earnings season, with TCS, Infosys, and HCL reporting profits that significantly above Wall Street expectations.
According to Aishvarya Dadheech, fund manager at Ambit Asset Management, “all of them recorded a solid beat on margin, with steady topline growth.”
According to Dadheech, mid-sized businesses like Mindtree and Cyient also reported much higher results.
According to experts, easing operational difficulties and margin recovery continued to be a significant feature that helped boost attitudes more than revenue growth. Problems on the supply side are being rectified.
The majority of businesses’ margin improvements in Q2 may be attributable to cost reduction, currency depreciation, and normalisation of subcontracting expenses.
High attrition, which remained a significant source of worry for investors, is beginning to ease.
The mean reversal of attrition is evident in Q1-Q2 FY23 due to lessening supply-side constraints, which would significantly assist in margin improvement in the next quarters, according to Dadheech.
Analysts predicted that moving forward, the decrease in attrition rate will be more obvious. Additionally, replacement costs have decreased.
According to Apurva Prasad, institutional research analyst at HDFC Securities Ltd., greater hiring by organisations like Infosys stays favourable and contributes to the optimistic outlook.
Analysts predicted that macroeconomic issues would have the most effect in the second half, but order wins have generally improved the outlook in that period.
As margin pressure eases, other factors that have recently resulted in profit downgrades are also getting better, according to Prasad.
The future may see sectors commanding higher value multiples, which is a good thing.
“The unexpected component was the upward revision of HCL and Infosys’ revenue forecast for FY23.
This is a sign of the growth confidence despite worries about the possible effects of the US and European economic downturn, according to Dr. V.K. Vijayakumar, chief investment strategist, Geojit Financial Services.
“Overall, IT majors’ Q2 performance exceeded street forecasts on the majority of metrics.”
However, currency headwinds persisted and had an effect. Although a higher dollar is beneficial to the industry, economists claim that weaker European currencies like the euro and pound are at least partly reducing the gains.
Even while other currencies are dropping, the higher dollar is providing currency tailwinds.
According to Omkar Tanksale, senior research analyst at Axis Securities, currency tailwinds have generated 80 basis points in positive reverberation. Over 40% of industry revenue is denominated in dollars.
Because personnel expenditures make up around 65% of the costs, the reduced attrition rate nonetheless remains a more significant benefit, according to Tanksale.
Tanksale lists the continued strength of demand and the success of even European areas as further advantages. He said, “This is a sign of the stability of the business structure of IT services organisations.”