Information technology (IT) stocks like TCS and Infosys have been giving good returns for quite some time. The sector’s revenue growth is now expected to moderate by 150 basis points (bps) quarter-on-quarter in the fourth quarter, given strong sequential growth in the past two quarters and currency headwinds of about 30-60 basis points.
Research report by brokerage firm Prabhudas Lilladher said, “We anticipate margins to decline by 40-80 bps q-o-q in Q4 led by supply-side pressures and decline in utilisation due to ramp-up in fresher hiring since the past few quarters. We believe margins will remain under pressure in FY23 as well given persisting supply side constraints and gradual return of travel and facility costs. We expect strong demand commentary from IT majors led by Infosys with revenue growth guidance of 11-13 per cent year-on-year CC for FY23.”
It said Infosys and TCS are expected to post 1.4-5.5 per cent q-o-q growth CC (constant currency) in revenues, while Mindtree and Coforge may register 3.9-8.5 per cent growth. Tech Mahindra is expected to lead the growth among major companies with 5.5 per cent q-o-q revenue jump, due to seasonal strength in communication and contribution from acquisitions.
IT companies will start declaring their financial results from next week, with TCS announcing on April 11, followed by Infosys (April 13) and Wipro (April 29).
“We anticipate margins (of the industry) to decline by about 40-80 bps q-o-q due to headwinds from aggressive hiring led drop in utilisation and backfilling of attrition with lateral recruits at higher costs, partially offset by rupee depreciation and operating leverage,” Prabhudas Lilladher added.
The sector is also expected to post healthy growth in headcount in Q4 as well as in FY23 given demand is chasing supply. Quarterly attrition will stabilise this quarter but is still at elevated levels. LTM attrition is expected to inch up. Russia Ukraine crisis is likely to add pressure on ER&D talent supply, the report said.
It added, “We expect healthy growth momentum in FY23 given continued demand for compressed technology transformation led by cloud, data analytics and customer experience. We expect Infosys to guide 11-13 per cent y-o-y CC growth in FY23 lower than 12-14 per cent y-o-y CC guidance, given at start of FY22 due to lower contribution from large/mega deals to TCV. We expect HCL to provide double digit revenue growth guidance. We estimate revenue growth of 12-15 per cent y-o-y USD for Tier 1 and 17-21 per cent y-o-y USD for Tier 2 in FY23.”
The brokerage firm expects Infy’s margin guidance to remain at 22-24 per cent for FY23. “Since HCLT’s margins are near lower end of their FY22 guidance band of 19-22 per cent, we expect HCLT to lower margin guidance band to 18-20% for FY23. We anticipate margins to remain under pressure in FY23 led by continued supply side pressures and partial return of travel and facility expenses.”
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