TCS, Infosys, HCL, TechM, LTIM, LTTS Q3 Results In Jan; What Should Be Your Investment Strategy In IT Stocks

Major IT companies will be lining up to declare their Q3 earnings report card for FY24 in January month. It will be tech giants TCS and Infosys that will kick start the quarterly results season from January 11th onward, with others following suit. Amid Q3 earnings, Analysts have recommended an accumulation strategy in IT stocks.

In Q3FY24, IT companies are expected to report subdued performance sequentially owing to their challenging macro environment. Among key factors to watch in Q3 earnings will be deal wins, constant-currency revenue growth, BSFI and Communications, Media & Technology (CMT) segment performance, margins movement, Q4 and FY24 guidance, attrition rate, headcounts, wages hike impact, rupee-dollar revenue, and management commentary.

As per the latest update on BSE, Infosys and Tata Consultancy Services (TCS) will be the first IT companies to declare their Q3 results on January 11th. It needs to be noted that TCS has already announced that it intends to make the balance provision of approximately $125 million in its financial statements as an exceptional item, for the third quarter and nine months ending December 31, 2023, due to EPIC Systems Corporation matter. Hence, TCS is going to bear the brunt of $125 million in its bottom line in the third quarter.

These two giants will be 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.

What To Expect From IT Companies In Q3?

In its research note, Kotak Institutional Equities said, "We expect a weak quarter for IT Services companies as furloughs, weak discretionary spending and project cuts impact performance. Three of the big five IT services companies should report a yoy and qoq decline in revenues in the December 2023E quarter, while growth for the other two will trickle down to low-single digits. We also expect weak deal TCV across most companies. Growth among mid-tier should vary considerably but should be better than that of larger players."

Further, Kotak's note added, "High furloughs in the hi-tech and financial services verticals and the pruning of discretionary programs will lead to muted performance across companies. Infosys, Wipro and Tech Mahindra will likely report a yoy and qoq decline in revenues. Growth for TCS and HCLT will likely stand at 0.5% and 4.3% on qoq and 1% and 2.2% on yoy comparison. Mid-tier companies will have mixed trends in growth, with a declining slope of growth for all."

In terms of guidance, Kotak's note said, "We expect Infosys to cut revenue growth guidance to 1-2% from 1-2.5% for FY2024E. EBIT margin guidance should stay unchanged at 20-22%. We expect HCLT to retain organic revenue growth guidance of 4-5% and EBIT margin guidance of 18-19%. Wipro should guide for the March 2024 quarter, which we expect to range from a decline of 1% to growth of 1%."

Also, expectations, are high about a recovery in discretionary spending in CY2024E. Kotak's note said, "Our analysis indicates that enterprises across most sectors are focused on cost-reduction priorities. Many have outlined cost-savings targets that stretch into 2024. The reprioritization of spending toward focus areas of investment is not yet complete. These do not inspire confidence in a significant recovery in discretionary spending, at least in 1HCY24. We do not think IT services management will comment about the CY2024 outlook yet."

"While the current environment is challenging, a couple of factors provide hope: (1) the pace of pruning discretionary programs has been reduced and (2) December 2023 has elevated furloughs, the impact of which will fade. We expect a return to growth for most companies in the March 2024 quarter," the brokerage added.

Which IT Stocks To Buy Sell Or Hold Amid Q3 Earnings?

Kotak's report said, "Stocks have rallied, limiting upsides for many. Infosys, Wipro and Mphasis should have weak quarters, while HCLT and Persistent should report a decent quarter. TCS should be steady."

Furthermore, the brokerage said IT stocks have rallied on expectations of rate cuts in the US, with the BSE IT Index increasing by 11% in a month. While rate cuts can reduce macro uncertainty and spark spending in the future, the haze around the near term continues. Significant recovery in discretionary spending, at least in 1HCY24, appears a low-probability event.

It added, "We expect 8-9% industry growth in FY2025E. Any moderation to our 1HCY24 estimates poses downside risks to our growth assumption. While the Fed's move warranted an upward movement in stock prices, the resulting rally was a tad optimistic, in our view. IT stocks have increased based on re-rating versus EPS upgrades. We recently downgraded HCLT to ADD from BUY and Persistent to REDUCE from ADD on a strong rally in stock prices by multiple re-ratings. We prefer our absolute BUY-rated stocks-Infosys and Cyient."

Meanwhile, expecting a subdued Q3, Vinod TP, Research analyst, Geojit Financial Services said, "The IT industry is likely to showcase muted QoQ growth in Q3 due to near-term challenges such as prolonged higher inflation & interest rate, delaying discretionary projects and slowing down future earnings growth. Valuations are above the long-term average; however, margins are expected to improve led by cost-cutting measures, easing attrition and improvement in utilization. Despite industry challenges, there is optimism in the sector, which is driven in anticipation of the end of the rate tightening cycle, which is expected to accelerate the resumption of delayed projects."

Future attention is on new demand emerging from technologies like generative AI, machine learning and cloud computing, as well as new deals won by Indian IT companies during 2023, Nair added.

Lastly, Nair said, "In context to the recent rally of the sector, IT may endeavour volatility in the short-term, however, don't foresee substantial weakening, offering accumulation strategy."

Q2 Performance Of IT Firms!

As per Elara Capital, Q2FY24 saw increased divergence between reported total contract value (TCV) and revenue growth. The tier-I firms' sluggish growth was a drag on the overall sector while the mid-tier performed well. Most companies reported record TCV (Infosys, TCS, Persistent Systems & Coforge), including Tech Mahindra, which reported a good TCV of USD 640mn. Mphasis has been slow to turn around with a muted TCV of USD 255mn.

Additionally, Elara's note mentioned within tier-I, Infosys performed well with 2.2% QoQ USD, while Tech Mahindra posted the weakest result with 2.4% QoQ USD contraction. Within the mid-tier, PSYS and Coforge continued to outperform with 3.1% and 2.3% QoQ USD revenue growth. The leading verticals were manufacturing, healthcare, and transportation. BFSI, telecom, and retail continue to be weak. Hi-tech showed a mixed response.

Moreover, KPIT Technologies was the prime beneficiary with 100% exposure to the transportation vertical (8.4% QoQ USD growth). Cyient also performed well with 4.7% growth, followed by TATA Elxsi and L&T Technology Services, which were up 3.3% QoQ and 2.9% QoQ, respectively, Elara's note added.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor 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.