IT sectors amongst poorly performing with NIFTYIT index declining 26% from beginning of 2022

The NIFTY IT index has dropped more than 26.33% in the first six months of 2022, and many major IT businesses reached their 52-week low during the same period. Due to the difficult financial conditions throughout the world, brokerages had projected in their preview report on the whole IT industry that the Q1FY23, would be a rather robust growth quarter for Indian IT sector companies. The management of top-tier and mid-cap IT sector enterprises also emphasized the strong demand environment brought on by cloud computing and digital transformation at the same time. While a few other analysts thought that the first quarter of FY23 would signal the start of the recovery and that IT firms would begin to recover from this quarter.

The high rates of attrition that were observed across the board in IT organisations are another crucial element to monitor. It is important to note that the Nifty IT index, which saw a significant initial correction and reached a 52-week low at 26189, has now begun to move sideways following Q1FY23 results and is taking resistance at 30559

The NIFTY IT index has already begun to consolidate. Let’s try to analyse the Q1FY23 performance of the IT sector by looking at the Q1FY23 results of a few leading companies in the industry and check whether it will resume an upward rally or if further downside is indicated.

IT Sector Q1FY23: Revenue increased YoY owing to expanding post covid demand while PAT still under pressure

Tata Consultancy Services (TCS) is one of the leading IT service providers with a presence in BFSI, communication, manufacturing, retail & hi tech. TCS reported 1.3% QoQ growth to US$6,780 million (Mn) while it grew 10.2% YoY. The company reported 15.5% YoY growth in CC terms for Q1. Vertical wise in CC terms, BFSI, retail & grew 13.9% & 25.1% YoY respectively while manufacturing, technology & services grew 16.4% each. Life sciences & media & communication grew 11.9% and 19.6% YoY, respectively. Infosys Ltd is one of the leading IT players catering to BFSI, retail, communication, manufacturing & hi-tech verticals.

Infosys has reported strong revenues for Q1FY23.$ revenues grew 3.8% QoQ to $4,444 million, up 5.5% QoQ in CC terms. In rupee terms company reported revenue of | 34,470 crore, up by 6.8% QoQ & 23.6% YoY. EBIT margins were down 150 bps QoQ to 20.1%. One significant point was the large deal TCV of$1.7 Bn, own 26.1% QoQ & 34.6% YoY.

HCL Tech, another IT giant reported rupee revenues of Rs 23,464 crore, up 3.8% QoQ, 16.9% YoY while dollar revenues came in at$3,038 million, up 1.5% QoQ, 11.7% YoY. IT business reported increased 0.1% QoQ to$2,201 Mn, ER&D business reported revenues of US$503 Mn, up 2.7% QoQ & P&P business reported revenue of US$334 Mn, up 9.9% QoQ. The company also maintained their guidance of 12-14% revenue growth in FY23. PAT of the company declined 8.9% QoQ to Rs 3,281 crore.

The company mentioned that the tax expenses increased compared to previous years due to increase in tax rate of SEZ units in India. HCL Tech remains confident on the demand environment with new TCV deal wins of US$2 billion (bn), up 23.4% YoY.

The company reported 1.5% QoQ growth in revenues at $1,632 Mn. In CC terms revenue grew 3.5% QoQ implying cross currency impact of 200 bps. In rupee terms, revenue grew 4.9% QoQ to Rs 12,708 crores.

L&T Tech’s revenue grew 3.2% QoQ USD above broker’s estimates of 2.3%. Management mentioned demand continues to be strong in Transportation, Plant Engineering and Industrial. Offshore revenue up by +160 bps QoQ to 56.2%, has further scope to increase up to 57-58% over medium term.

Attrition rate: still higher than average putting pressure on EBITDA margins

TCS’s attrition continued to inch up, which is at 19.7% (up from 17.4% in the previous quarter). The management sounds cautious on attrition since their commentary suggests that attrition would take a few months to settle down and it is expected to cool off only in H2FY23.

Infosys indicated that it had rolled out a wage hike to about 80% of its employees in Q1, while for senior employees it will be given in Q2. The company also indicated that the wage hike given were higher compared to last year to retain key talent. The company also mentioned that sub-contractor cost has increased sharply due to on site attrition in the quarter. They also reported LTM attrition of 28.4%, up by 70 bps QoQ.

HCL Tech reported LTM attrition increased by 190 bps to 23.8%. The company indicated that attrition would continue to be high in the next quarter and expects to moderate only in H2FY23. The company also indicated that it is taking a little more time for freshers to become billable. It is working on the strategy to improve the same for incoming freshers for the rest of the year.

The company reported 1.5% QoQ growth in revenues at US$1,632 Mn. In CC terms revenue grew 3.5% QoQ implying cross currency impact of 200 bps. In rupee terms, revenue grew 4.9% QoQ to | 12,708 crore.

While Tech Mahindra indicated that it would roll out its annual wage hike in Q2 & it will impact margins by 100 bps. However, the company also indicated that the margins are bottomed out in Q1FY23 implying improvement in margins from Q2 onwards. The company indicated that LTM attrition declined by 130 bps QoQ to 22%.

L&T Technologies’ EBIT margin was resilient at 18.3% (-30bps QoQ). Q2FY23 margins will be impacted by wage hikes but targets to maintain them above 18% for FY23. Employee costs are up by 300bps QoQ due to lower utilization and upfront talent investments required for 1-2 large deals won in previous quarter. Wage hike impact in Q2FY23 is expected to be partially offset by revenue growth and operational efficiencies. LTM attrition increased sharply to 23.2%, +280 bps QoQ is expected to stabilize from hereon.

Our view

IT companies in the Q1FY23 saw robust YoY growth in their revenue with rebound in post covid demand. Most of them also managed to win good orders in Q1FY23 with TCV rising in double digits in Q1. While their margins continue to remain in pressure due to higher attrition rate challenge faced by entire industry as well as the wage hikes given by them. Though few of them including Tech Mahindra believes their margins have bottomed out in Q1FY23, rest believes the margin situation to improve in H2FY23.

As most of the companies in this sector have their share price trading at 52 weeks low, a recent sideways trend post Q1FY23 results can be seen. In all likelihood, the downside seems to be over and any fresh triggers would start pushing IT stocks higher. Therefore, investors can either start accumulating shares or wait for the resumption of the upward rally as soon as indicators turn bullish.

 

About the Author

Ketan Sonalkar (SEBI Rgn No INA000011255)

Ketan Sonalkar is a certified SEBI registered investment advisor and head of research at Univest. He is one of the finest financial trainers, with a track record of having trained more than 2000 people in offline and online models. He serves as a consultant advisor to leading fintech and financial data firms. He has over 15 years of working experience in the finance field. He runs Advisory Services for Direct Equities and Personal Finance Transformation.

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