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Weak guidance, muted sentiment to weigh on near term IT outlook

April 25, 2023 10:38 IST

The two IT majors -- Infosys and TCS -- delivered disappointing results for the fourth quarter of the 2022-23 financial year (Q4FY23). Poor macro conditions and weak sentiment in the banking, financial services and insurance (BFSI) space accounted for the miss.

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For TCS, revenue in constant currency (CC) terms grew at 0.6 per cent on a quarter-on-quarter (QoQ) basis.

Weakness was visible in North America, primarily due to deferred discretionary spending.

 

On the year-on-year YoY basis, revenue grew by 10.7 per cent.

Customer sentiment across BFSI, retail and technology (particularly in US) was poor.

The banking sector crisis in March 2023 may lead to uncertainty and growth deceleration across other verticals as well.

But the UK, Canada and Scandinavia areas continued to outperform.

Growth in Q4FY23 was led by retail & consumer packaged goods (CPG), which grew by 13 per cent YoY while life sciences and healthcare grew by 12.3 per cent YoY in CC terms.

Other verticals grew in single digits.

TCS saw more deals related to operating model transformation with 29 large operating model transformation deals in FY23 compared to 18 deals in FY22. Another growth driver was cloud transformation.

Despite weakness in revenue, the order inflow for Q4FY23 was strong.

TCS could benefit in the short term from the BFSI crisis since the larger US banks are seeing record levels of deposits and TCS may derive higher quantum of business from this segment.

The guidance continues to maintain a target of 26-28 per cent Ebit (earnings before interest and tax) margin, although it is hard to set a timeline for this.

TCS mentioned that clients are displaying strong demand for ChatGPT kind of generative artificial intelligence (AI) deployment and TCS has been working on this.

Headcount is practically flat with addition of 821 employees to the workforce of 6.14 lakh.

The FY23 saw net addition of 22,600 compared to a jump of 103,546 in FY22.

Attrition is down to 20 per cent, a drop of 1.2 per cent QoQ.

Current chief executive officer and managing director Rajesh Gopinathan will be stepping down from TCS on September 15, 2023 while K Krithivasan takes over but the transition is expected to be smooth since both are long-term TCS executives.

Infosys saw unplanned delays in projects, delay in client decision-making and absorbed some one-off revenue impacts.

Revenue guidance was missed and management cited weakness in BFSI, telecom, retail, and hi-tech.

Among geographies, North America is more badly impacted.

Revenue declined by 2.3 per cent QoQ to $4.55bn (down 3.2 per cent QoQ and up 8.8 per cent YoY CC).

The Ebit margin declined by 50 basis points (bps) QoQ to 21 per cent, partly due to a one-time revenue impact (down 90 bps).

Adjusted profit stood at Rs 6,130 crore.

Growth was led by retail (2.5 per cent up QoQ) and ‘others’ (15.1 per cent), while communication (down 11.2 per cent), hi-tech (down 7.1 per cent), BFSI (down 3.7 per cent), life sciences (down 3.6 per cent) had weak results.

Infosys guidance is 4-7 per cent YoY CC revenue growth for FY24, given visible caution from clients and prevailing macro uncertainties.

Even achieving this may require some big deal wins.

Guidance is for 20-22 per cent Ebit margin in FY24, which is 100 bps lower than at Q1FY23.

The headcount declined by 3,611 employees in Q4.

There are both ‘buy’ and ‘sell’ recommendations for the two IT majors.

In practical terms, sentiment across the IT services segment is weak.

Unless there’s extraordinarily good guidance and results from other frontline IT stocks, there will be more selling before the market settles down.

Devangshu Datta
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