Indian IT sector growth continues, high attrition mars margin performance- Technology Q2FY23 Preview

What’s Buzzing 

IT companies are expected to witness continued growth momentum in Q2. Margin expansion sequentially is anticipated to be restricted, despite wage hike for a majority of the companies already being behind, due to continued high attrition. 

Context 

We expect Tier I IT companies to post CC revenue growth of 3-5% for Q2FY23 with Infosys being at the higher end (5% CC revenue growth) while TCS, Wipro & HCL Tech (IT services) are expected to post constant currency (CC) revenue growth of 3%, 4% & 3.5% QoQ, respectively. Among tier II IT companies, we expect Mindtree to post revenue growth of 5% QoQ in CC while TechM, LTI & Coforge are expected to post growth of 2%, 3% & 4.5%, respectively, in CC terms. We expect cross currency headwinds in the range of 100-150 bps impacting the dollar revenues of companies. Despite wage hike for the companies like TCS, Infosys, LTI already factored in Q1, we expect moderate margin expansion in the range of 20-50 bps QoQ for Top four companies. For Mindtree, margins are expected to decline 130 bps QoQ due to wage hike in the quarter while for Coforge, we expect margin expansion of 155bps QoQ due to planned utilisation improvement. 

Our Perspective 

Sequential growth in IT companies in CC terms is expected to be strong in Q2 due to traction in deal momentum. Companies continue to maintain that they are witnessing weakness in tech spending in few pockets of client portfolio i.e. BFSI and retail but overall growth remains strong at least for CY22. In our view, Infosys and HCL Tech are likely to maintain their revenue guidance of 14-16% and 12-14% in CC term for FY23. However, we also believe that considering macro uncertainties ahead, Infosys is likely to maintain this guidance for the rest of the year unlike previous years, where it had increased guidance in every subsequent quarters. Attrition continues to be a be a major headwind for companies despite wage hike for the companies already being done in Q2. It is expected to restrict margin expansion in the range of 20-50 bps for Tier I companies in Q2 as this, along with facility and travel expenses will be headwinds. Some tailwinds, which are likely to provide momentum to margin, going ahead, would be pricing and utilisation improvement.