Q1FY23 Preview: IT sector to report strong June quarter results; revenue growth in CC terms seen at 2-5% QoQ

The first quarter of the financial year 2022-23 (Q1FY23) is expected to be a reasonably strong growth quarter for Indian IT players given the challenging macroeconomic global scenario, brokerages said in their preview report on the overall IT segment. 

The June quarter earnings season has begun this week and Tata Consultancy Services (TCS) will be the first major NIfty50 company and stalwart in the IT sector to announce its Q1FY23 results on Friday, July 8, 2022. 

Domestic brokerage firm Philip Capital pointed out that the growth momentum is likely to continue with Tier-II players outperforming Tier-I players yet again. In the same line, Motilal Oswal believes that the growing deficit in Tier I players against Tier II peers will further narrow in Q1FY23. 

Motilal Oswal is watchful of any moderation in the demand commentary across both Tier I and Tier II companies in the IT Services space, while the managements indicated continued momentum in spends on technology services. 

Philip Capital is of the view that the supply-side pressures will continue to weigh on margins with USD/INR depreciation of 2.6 per cent sequentially expected to offset it partially. Besides, Q1 will also have the wage hike cycle for some players like TCS, Infosys, Tech Mahindra, L&T Infotech, Coforge, and Cyient.  

Similarly, Motilal Oswal sees muted margins in Q1FY23 due to of wage hikes and continued supply-side pressure as attrition is still elevated, however, expects that the long-term demand environment remains unaltered. 

Philip Capital expects the sector to report organic CC (constant currency) revenue growth of over 2.3 – 5 per cent, excluding Cyient, with multi-year high cross-currency impact in Q1 due to depreciation of major currencies (GBP, EUR, AUD, JPY) against USD.  

While Motilal Oswal believes Tier I companies should deliver revenue growth in a narrow range of 2.3-3.9 per cent sequential (CC) and Tier II players will grow in the 1.9-5.3 per cent range, excluding PSYS, which will grow by 9.5 per cent due to a meaningful contribution from recent acquisitions. 

The commentary on demand, the impact of an upward price revision, and a weakening macro-economic outlook on deal conversion will be key monitorable to look for, Motilal Oswal said.