Yesterday India's largest IT services firm Tata Consultancy Services reported revenue of US$ 6.87 billion in the Q2 of FY23, up 4.0 percent QoQ Constant Currency and 50bp above estimates. TCS also reported deal wins of US$ 8.1b during the quarter and its EBIT improved 90bp QoQ to 24 percent (vs. 23.5 percent estimated) despite supply pressures. Management commentary on the demand environment and deal pipeline remained intact with no visible impact of weakening macro environment. There are however concerns from the management about risks to deal pipeline and conversion in Europe due to uncertainty around energy prices. There is also caution for longer term deals and the company is experiencing some delayed decision making in Europe, but it continues to see a strong spending environment in the US.
As per a report by Motilal Oswal there are concerns about the Q3 margins of TCS due to the time lines of cost optimization. However experts from Motilal Oswal expect supply situation to ease out in the second half of FY23 along with benefits from increased fresher additions in the last few quarters and lower sub-contractor costs that in turn will aid margins of the company.
Though the overall Indian IT services segment is expected to experience steady sequential constant currency revenue growth in Q2, but adverse cross currency is likely to impact the reported USD revenue growth of many IT services companies. As per a report by the Emkay Global Financial Services the revenue growth of Indian IT services companies is expected to be 2.5-4.5 percent CC QoQ (Quarter on Quarter) for Tier-1 IT services companies and of 0.1-5.3 percent for Tier-2 firms, in the Q2 of FY 2023 quarter.
As per the report from Emkay it is also expected that the EBITM (Earnings before interest and taxes and Management) would remain under pressure on YoY basis, due to continued supply side challenges, higher back filling costs and limited cost pass through via higher pricing. The sequential EBITM trajectory would reflect the salary hike cycle. Due to cross-currency headwinds, benefits from rupee depreciation are likely to be marginal for IT services companies in the Q2.
Q2 likely to be a steady quarter, cross-currency headwinds expected. The report also expects that the Q2 growth momentum would remain steady, but there are likely to be challenges like job losses or freeze at client organizations and an elongated sales cycle highlighted by some global software majors indicating a slowdown in the coming quarters. The report points that Indian IT services companies have also highlighted pockets of weakness from segments such as the retail, high tech, etc in the recent months.
Experts at Emkay Global expect that among the companies Infosys is likely to retain its 14-16 percent CC YoY revenue growth and 21-23 percent EBITM for FY23. HCL Tech is also likely to retain its 12-14 percent CC revenue growth and 18-20% EBITM guidance range. At the same time Wipro should guide to 0-2 percent CC QoQ revenue growth for Q3 FY23. Cross-currency movements remain adverse, with GBP (Great Britain Pound), EUR (EURO), AUD (Australian Dollars) and Japanese Yen depreciating by approximately 6 percent, 5 Percent, 4 Percent, and 7 percent QoQ, respectively, against the US$. This is likely to weigh on reported US$ revenue and margins.
It is also expected that EBITM is expected to remain under pressure on YoY basis due to continued supply-side challenges, higher backfilling costs, increase in travel and back-to-office related costs, and limited pass through of costs through higher pricing. The sequential EBITM trajectory would reflect the salary hike cycle (Wipro, HCL Tech, Tech Mahindra, Mindtree, Persistent Systems, Birlasoft). Due to cross-currency headwinds, benefits from rupee depreciation will be marginal in Q2. The Emkay Global report expects supply-side challenges to ease to some extent in coming quarters which would support margin recovery.
There could also be challenges such as deferment or cancellation of projects due to macro uncertainties, high inflation and supply-chain disruptions, pricing environment amid high inflation and tight labour markets and supply-side challenges and attrition besides others factors.