Earnings preview: Tech sector likely to post tepid Q2 numbers in another lukewarm quarter

As tech heavyweights like Tata Consultancy Services, Infosys and HCL Tech prepare to report their second quarter (July-September) earnings this week, sectoral analysts predict another subdued quarter for the Indian IT industry. Little has changed compared to the April-June period of the ongoing fiscal year, despite some players bagging mega deals.

“Q2 in all likelihood could again be a relatively muted quarter, across the board,” said Deepak Jotwani, assistant vice president at ICRA Ltd. While the deal wins in general have been good in the past quarter, the ramp up of those deals is taking longer than usual, he reasoned. 

“There is a certain pushback from some clients who are hesitating and thinking twice before spending,” attested Biswajit Maity, senior principal analyst at research and consulting firm Gartner. 

While no major player is expected to register degrowth, Maity anticipates a lower single digit annual quarterly growth for the top-5 Indian IT players - TCS, Infosys, Wipro, HCL Tech and Tech Mahindra.

Others agreed. 

“On an average, it could be 2-4 per cent at best, taking the dollar bias under consideration,” said Jotwani, who also cited a base effect in play, apart from continued softness in demand from key sectors.

He listed strong order book placements, IT attaining an inherent position in overall corporate spending, and investments in artificial intelligence as crucial tailwinds for the industry.

Talking about IT bellwether Tata Consultancy Services, Nirav Karkera, who heads research at financial services provider Fisdom, said: “Expectations around a buyback are very much on the table with increased probability of the same materialising at favourable prices.”

Infosys, on the other hand, which has been consistently securing high quality, big ticket contracts, remains vulnerable to global macroeconomic pressures and may report tepid earnings growth for the quarter, Karkera added. He foresees much the same performance from Wipro Limited.

Sonam Srivastava, founder and chief executive of Wright Research, however, highlighted that while the IT sector may not post a significant surge in earnings, a positive shift in outlook and commentary is expected.

Indian IT companies gained from accelerated demand for digitisation during the Covid-19 pandemic, translating into escalated earnings and order books. This was however, followed by a softening in demand owing to slowdown in the West. Simultaneously, a workforce demand-supply mismatch was also in play, leading to high attrition and wage-cost inflation eating into profitability of most players.

Jotwani does not see a significant improvement in hiring this fiscal year. “Hiring is likely to remain tepid over the next 2-3 quarters at least,” he noted. 

The sector is likely to carry forward challenges seen in the previous quarter - from spillover of global macroeconomic uncertainty to reduced discretionary spending by clients - however, with declining intensity. Experts privy to happenings in the industry see recovery picking up in the back half of the year, with the last quarter ringing in better days for the sector. 

Maity sees the sector posting double digit growth, starting FY2024-25. Analysts singled out the prevailing global macroeconomic uncertainty leading to delayed decision making as the strongest headwind facing the sector.

Overall, it is set to be a mixed bag this earnings season, with some sectors expected to reflect more hits than misses, as the tech and banking sectors may report a washout quarter. “While sectors like capital goods, metals and pharmaceuticals are poised to post strong numbers, the banking and auto sectors might face challenges,” said Srivastava.