IT Q2FY23 Preview: TCS, Infosys, Wipro, HCL likely to post muted performance; check stock price targets

IT Q2FY23 Preview: India's largest software services provider Tata Consultancy Services (TCS) is set to announce its July-September quarter results on October 10, kicking off the Q2 earnings season for the IT sector. Ahead of TCS results, which will set the tone for peers, brokerages remain cautious amid persisting woes on the margin front as key markets the US and Europe face slowdown headwinds. 

Domestic brokerage HDFC Securities expects Tier-I IT companies to deliver sequential growth in the range of 2.4 to 4 per cent in constant currency (CC) terms. It added the cross currency impact severity to be similar to last quarter with -1.3 to -1.8 per cent sequential. Companies providing services in other countries represent their earnings in constant currency. It refers to a fixed exchange rate that eliminates fluctuations when calculating the results.

Another brokerage Philip Capital hopes that the growth momentum is expected to continue with Tier-II players outperforming Tier-I players yet again. 

“Rupee has sharply depreciated against USD in Q2, but the benefit will be partly offset by USD also appreciating against other currencies resulting in higher-than-normal cross currency impact, much like Q1," Philip Capital said in its research report. 
It also expects margins to remain stable quarter-on-quarter (QoQ), for most companies, except ones with wage hikes, on stabilizing attrition and operating leverage, driven by growth and utilization. 
Similarly, HDFC Securities believes that there is a low downside risk to margin even in an event of rapid demand moderation. It said that resilience is reflected in the continued growth premium of Tier II IT companies and nearly unchanged consensus earnings estimate.

The brokerage house recommended a Buy rating for the stocks from the IT pack, including TCS, Infosys, HCL Tech, Wipro and Tech Mahindra for a target price of Rs 3,620, Rs 1,790, Rs 1,125, Rs 470 and Rs 1,080, respectively.

Sector And Company – Q2FY23 Expectations By Philip Capital

TCS: We expect CC revenue growth of +4.6% QoQ on strong momentum in digital transformation programmes. Expect growth to be broad-based across verticals. Margins are expected to expand by +70bps QoQ on the absorption of wage hikes, USD/INR Depreciation etc. Headwinds include supply side pressures & increase in travel, and facility costs.

Infosys: We expect strong CC revenue growth of +5.3% on strong momentum and ramp up of past deals. Margins are expected to expand modestly by +30bps QoQ amid USD/INR depreciation and operational efficiencies, offset by likely lower utilization, senior management salary hikes and travel expenses. We expect Infosys to retain 14-16% CC revenue growth and 21-23% EBIT margin guidance.

Wipro: We expect IT services CC revenue growth of +4.0% in line with its guided range of 3-5% on large deal ramp ups; it will include two months impact of Rizing. Margins are expected to expand modestly (+20bps) with headwinds like salary hikes & promotions, offset by growth, utilization improvement and efficiencies. We expect Wipro to guide for +1% to +3% CC qoq growth for Q3.

HCL Tech: We expect CC revenue growth of +4.0%. Growth to be driven by services (IT services & ER&D) while P&P will remain muted. Margins are expected to expand moderately (+40bps) as HCL will have salary hikes spread over Q2 & Q3, to be offset by growth and operational efficiencies. We expect HCL to retain its FY23 growth (12-14% CC) & margins guidance (18-20%).

Tech Mahindra: We expect muted CC revenue growth of +2.1% qoq. Expect Telecom to lead the growth. Margins are expected to expand moderately (+30bps) as wage hike impact (80-100bps) will be offset by operational efficiencies.