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    IT stocks rally upto 4% as Q2 earning season begins today

    Synopsis

    Although the September quarter has been seasonally strong for Indian software exporters, analysts stated this time Q2 earnings are likely to show a continuation of weak demand with macro uncertainty prolonging.

    IT stocks rally upto 4% as Q2 earning season begins todayiStock
    Shares of information and technology companies climbed up to 4% in Wednesday's trade on BSE as the September quarter earnings will kickstart today. The Q2 earnings of India's top IT firm Tata Consultancy Services are due later in the day.

    Shares of Wipro were the top gainers in today’s trade as the stock surged up to 4% to Rs 423.8 apiece. While, shares of Mphasis, and Persistent Systems rose over 2%. Coforge, LTIMindtree, L&T Technology Service, and Infosys surged over 1% each.

    Although the September quarter has been seasonally strong for Indian software exporters, analysts stated this time Q2 earnings are likely to show a continuation of weak demand with macro uncertainty prolonging.

    "We expect continued weakness of India's IT services companies (particularly in CMT vertical and discretionary revenue) to weigh on the sector's 2QFY24F and FY24F revenue growth outlook. We believe the void created by the lower number of small-sized and discretionary projects along with delays in client decision-making and ramp-up of won projects in certain cases will lead to both revenue and margin disappointments in the near term, given the ‘sticky’ nature of costs," Nomura's Abhishek Bhandari said.

    His analysis suggests the current slowdown to be an entire FY24 phenomenon rather than 1H and the impact possibly extending to FY25 discretionary spends.

    What to expect from Q2 earnings season:

    1) Revenue growth
    While Nomura expects largecaps to report revenue growth ranging from -1% to +2% QoQ and midcaps to report growth ranging from +0.7% to +3.3% QoQ in constant currency (cc) terms, Jefferies expects aggregate revenues to grow by 0.5% QoQcc, marking a return to growth after two-quarters of revenue decline.

    "We expect Infosys (+1% QoQcc) to lead on growth, while TechM (-1% QoQcc) and Wipro (-1% QoQcc) are likely to lag. Among mid-sized firms, we expect Coforge to lead with 2.5% QoQcc growth, while growth at LTIM would be soft at 1% QoQcc," Jefferies said.

    The impact of cross-currency headwinds could be limited to 30bps.

    2) Deal wins
    With Infosys, TCS, and HCL Tech bagging key large deals centring around cost optimization and consolidation, booking velocity has been strong in the sector.

    "We expect collective deal TCV (Tier1 + Tier 2) growth to stay in line or improve sequentially vs. Q1. Q1 reported a 1% QoQ decline in deal TCV. However, with elongated ramp-up, these deals will have limited contribution in the second quarter," Motilal Oswal said.

    3) Margins
    In terms of margin performance, TCS and HCL Tech are likely to outperform, while the margins of LTIMindtree and Tech Mahindra are expected to decline by 120bps and 75bps, respectively. Within mid-tier IT, Sonata Software and Persistent Systems are expected to lead growth while Zensar is expected to lag.

    "Some saving graces for the industry will continue, in our view, such as easing supply side challenges through falling attrition and salary hikes returning to usual levels compared to the huge spike seen in FY23," Nomura said.

    4) Management Commentary
    Investor focus would be on commentary around the demand environment and any signs of improvement or recovery expectations in 2HFY24. JM Financial expects HCL to reduce its organic services/consolidated revenue growth guidance by 2 ppt to 4.5%-6.5% and 4%-6% respectively.

    "We expect Coforge to cut its guidance from 13%-16% to 12%-14%. We expect Wipro to guide for a 0-2% cc QoQ growth for 3Q. Players may however retain their margin guidance. Investors should also look for any signs of possible budget flush and indication of higher/lower impact of furloughs in 3Q," it said.

    5) Corporate Action
    TCS is expected to announce a share buyback programme along with its quarterly results. Last year, The Mumbai-based software exporter declared a buyback worth Rs 18,000 crore, which amounted to about 1.08% of its equity share capital.

    (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)



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