Infosys to lead the pack this earnings season while margin pressure will continue for two quarters

• Margins are likely to be impacted on account of wage hikes, high retention costs, increased travel costs, visa costs and sharp cross currency headwinds.
• Even in bad times, one tech major could outdo the others and most analysts believe that it would be Infosys.
• Earnings season begins with the results of major IT companies -- TCS on July 8.

The earnings season has arrived and investors have already started factoring in the potential performance of bluechips like TCS, Infosys, Wipro, Mindtree, Mphasis that are to declare quarterly earnings this month.

The IT services companies will continue to remain stressed because of macro concerns, wage hikes, high retention costs, increased travel costs, visa costs and sharp cross currency headwinds.

Best amongst the equals
Analysts feel among other IT players, Infosys could lead the pack since it bagged large deals which will provide it with good revenue.

“We anticipate Infosys to lead on the organic revenue front with growth of 4.3% on quarter in constant currency, followed by TCS at 3.6%. Growth in TechM, Wipro and HCL is expected to be soft due to seasonal weakness and moderation in demand,” said a report by ICICI Securities.

Bangalore-based Infosys is well equipped to deliver industry leading growth even in case of slowdown given differentiated cobalt cloud capabilities, smooth execution of mega deals.

In fact, Infosys could remain the ‘vendor of choice’ even if recession comes.

Most analysts are flagging concerns over cross currency headwinds that will impact revenue of almost all IT firms as currencies of every other country have been impacted due to economic slowdown.

“Cross currency headwinds of 100-200 basis points are likely to result in lower US$ revenue growth this quarter for all IT services companies. All companies will face cross-currency headwinds from 5%, 6.6% and 1.7% appreciation of US$ against Euro, Pound and Australian dollar, respectively,” said the report.

Pressure on margins will remain
The IT companies will face margin pressure for two more quarters as clients may postpone spend amid global inflation and heightened uncertainties.

“We believe the first and second quarters of FY23 will be the peak for margin pressure and gradually margins will improve the second half onwards, but revenue momentum is expected to start softening from second half of FY23 and also for FY24 on account of clients postponing spends, absence of large deal wins and softening deal win momentum ahead,” said a report by ICICI Securities.

While the long-term demand environment remains unaltered, analysts anticipate an impact in the second half of FY23 and FY24 due to elevated inflation and an economic slowdown in both the US and Europe.

This earnings season investors will focus on qualitative commentary on the second half of FY23, hiring and attrition trends and demand outlook in key verticals like financial services and retail.

Meanwhile, IT stocks may continue to fall amid “worsening macro commentary is expected to flow down to industry deal flow and revenue over the next few quarters,” say analysts at Motilal Oswal.

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