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Tuesday, November 29, 2022

Infosys leads IT industry Q2 show with 4% revenue growth, says Jefferies

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  • infosys is expected to report 4% quarter-on-quarter revenue growth for the second quarter, according to a report from Jefferies.
  • The report also says Infosys is expected to announce a buyback along with its second quarter results.
  • TCS is expected to record the best margin improvement among IT companies up to 50 basis points.
  • All eyes are on Infosys, HCL Tech and Coforge for any revision in FY23 guidelines.

IT giant Infosys is expected to report 4% quarter-on-quarter revenue growth in constant currency for the second quarter of FY23, according to a report from Jefferies. This growth will be driven by increase in deals and seasonal strength, says the research firm, which estimates India’s estimation IT sector revenue growth of 3.6% for the quarter.

The report also said the Bangalore-based IT company was expected to announce a buyback along with its second quarter results on Oct. 13. A buyback reflects the company’s optimism about its own shares and is increasingly used by companies to reward shareholders. It also reduces the outstanding shares in the system and increases the share price.

Along with all IT stocks, Infosys’ stock price has also been battered over the past six months, as it fell more than 35% on fears of a recession in its largest market, the US.

However, Jefferies shares some of Infosys management’s optimism about the company’s prospects, as it believes it is “better placed” to face headwinds in several currencies – the pound and euro are in value. declined while the dollar appreciated.

“We expect EBIT margins to expand by 30 basis points on a quarterly basis, driven by pyramiding, operating leverage and price advantages, amid supply-side pressures, higher costs and continued investment in growth. We expect Infosys to maintain its forecast of 14-16% YoYcc (constant currency) revenue growth and 21-23% margin,” said a report from Jefferies.

Wipro is also expected to match Infosys’ sales growth on an inorganic basis.

TCS leads in margins
TCS is expected to post the best margin improvement to 50 basis points, far ahead of industry estimates of 30 basis points.

“We estimate that EBIT margins will improve by 50 basis points QoQ to 25.6%, driven by pyramiding, operating leverage and price advantage, amid continued increase in travel/discretionary spending and supply-side pressures,” the report said. . Jefferies estimates TCS revenue for the quarter will grow 3.5% in constant currency.

Most other IT companies will continue to cope with the pressures of wage increases and high turnover. A recent report from TeamLease forecasts a 55% growth in employee turnover for FY23, compared to 49% in FY 2022.

“We expect pay increases at HCL Tech, Wipro, TechM and Mindtree; continued pressure on the supply side; and higher travel costs to push margins. However, this is likely to be offset by benefits from an improved pyramid, operating leverage and pricing and recovery from some one-off costs in the prior quarter,” the report said.

Demand trends continue
Accenture’s recent revenue forecast of 8-11% for FY23 has set alarm bells ringing in the IT sector as it fell below estimates.

“Given the increasing likelihood of global recessions, investors remain concerned about the likely depreciation of technical spending, which has (a) led to a correction in the sector via CY22YTD,” according to a report from JM Financial.

The research firm suggests that the focus should shift to short-term demand trends. “A few Tier II techs have suggested the potential of certain customer-specific challenges and higher-than-expected vacation days in 3QFY23,” the JM Financial report said. However, she believes that supply-side headwinds are ‘easing somewhat’.

Jefferies also says the focus will be on management commentary on the demand environment. “Commentary on deal pipeline, sales cycle, nature of deals and deal duration, pricing and supplier consolidation will be closely monitored. Furthermore, there will be a strong focus on commenting around customer budgets or reprioritisation of customer spend,” it said.

It will also closely monitor a revision of the FY23 guidance from Infosys, HCL Tech and Coforge. However, it does not expect this to happen as part of its second quarter results announcements.

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