IT Q3 Results Preview: Another Sluggish Quarter With BSFI, CMT To Still Be In Pressure; Upcoming Dividends

IT Q3 Results Preview: Technolgy companies are set to kick start the December 2023 quarterly earnings season with TCS and Infosys results on January 11. Broadly, the companies are expected to report another subdued quarter as challenging macro conditions persist. The market in North America will be the biggest spoilsport, as the BFSI and CMT segments continue to be still under pressure in this region, which has dragged tech companies' earnings in Q2 as well.

Sales of IT companies have been sluggish in Q3 owing to season softness. Hence, Tier-1 tech companies may post CC revenue growth in the range of -2.1% to 4.3% sequentially, while tier-2 companies may record 1% to 5.2% CC growth. There are higher-than-normal furloughs for some companies. Further, the slowdown in discretionary spending continues.

Among key factors to watch out for will be tech companies' FY24 guidances, management commentary, deal wins, CC revenue growth, wage hike impact on margins, attrition rate, and outlook ahead.

What to expect in Q3 for the IT sector?

Analysts at Equirus Securities in their research note said, "We expect sluggish sales performance across top-6 large caps (except HCLT) during 3QFY24E given seasonal softness (with higher-than-normal furloughs for some) and continuation of the slowdown in discretionary spend/deal ramp up across many industries."

Further, these analysts added. "We expect top-6 large caps to report CC US$ sales dip of 2.6% to the growth of 5.2% QoQ in 3Q (Wipro at the lower end and HCLT at the upper end). In midcaps, we expect relatively healthy sales growth from eClerx, PSYS, KPIT, LTTS, Coforge and BSOFT."

Considering tailwinds from declining supply-side issues and currency and headwinds from wage hikes (in Infosys, Wipro & HCLT) and soft growth, Equirus analysts note said, "we expect mix performance in Adj. EBIT margins with (-)68bps to (+)61bps qoq in top-6 large caps."

Talking about the geographical market, Equirus analysts note, "With the expectation of soft landing of US economy, we expect some gradual recovery in discretionary spend in the medium term (as implied from sales growth guidance of Accenture for 2HFY24E with Aug year-end). We expect ramp up in earlier won large cost take out deals starting 4Q."

Hence, Equirus believe that the predictability of growth uptick in FY25E is becoming healthier unless new major macro events unfold in the US/Europe. Hence, it believes that the Nifty IT index will find support around the 5-year mean.

Meanwhile, in its preview note, Dolat Analysis & Research Theme said, "We anticipate another subdued quarter with Revenue growth of -2.1% to 4.3% QoQ in CC terms amongst our Tier-I IT names, and 1% to 5.2% CC growth for Tier-2 names for Q3FY24E, amidst delayed revenue conversion and muted demand environment. EBIT margins too, will be impacted, with higher than expected furloughs in Hitech/BFSI putting additional pressure, hence we see QoQ movement of -150bps to 200bps in Q3FY24E."

BFSI and CMT continue to be under pressure. Dolat's note said, "Our interactions with industry participants indicate BFSI and CMT continue to reflect pain especially in the US led by the weak macro environment as the pace of mega-deal cancellations continue (i.e. Infosys $1.5bn; after TCS $2bn with Transamerica in Q1)."

Moreover, Dolat's note added, " Our stance on a slowdown in IT services remains intact for the near term as deal wins remain muted and delayed revenue conversion to impact growth in Q3/Q4. However, IT stocks saw a sharp up-move on expectations of rate cuts, which we believe is unwarranted as any revival in demand for discretionary spending would have a time-lag of a couple of quarters at least. Our preference is for large-caps, given the lower risk to estimates/PER."

Giving a detail on deal wins, Kotak Institutional Equities analysis indicated that a list of deals announced by key IT companies in the Dec-23 quarter. Most deals are from Europe-headquartered clients. Only three out of 29 are from North America, significantly lower than the average of ~8 in the last seven quarters. The number of deals from Europe and RoW is roughly similar to their last seven-quarter averages. None of the three deals announced in North America are from the crucial BFSI, hi-tech, manufacturing,
retail and telecom verticals.

According to Kotak, weak deal wins in the North American geo indicate that the trend of moderation in the number of deal wins/TCV from the region as witnessed in the disclosures of Infosys and TCS will continue.

On IT stocks, Kotak's note said, "IT stocks have re-rated in the last several months on rate-cut hopes, leading to expensive valuations for many. Infosys provides comfort around growth acceleration and upside potential in the event of a significant recovery in discretionary spending, and it also trades at reasonable valuations. Upsides are moderate in TCS and HCLT after the recent run-up in stock prices.

The IT sector's Q3 earnings will begin with Infosys and Tata Consultancy Services (TCS) financial results on January 11, followed by HCL Tech and Wipro earnings on January 12th, L&T Technology Services (LTTS) and LTIMindtree on January 16th and 17th respectively. While Persistent Systems will declare its earnings on January 20th, Tech Mahindra on January 24th, Cyient on January 25th, and KPIT Tech on January 30th. Dates of Q3 results of other IT companies will be announced shortly.

Some of these IT companies like TCS and HCL Tech have declared that they will consider rewarding shareholders with interim dividends for FY24. The companies have fixed record dates for the same as well.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author or Greynium Information Technologies. The author, the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.