New Delhi : Most information technology (IT) services majors continued to show resilience in the current environment, even though macro headwinds were expected to remain strong. The September quarter performance of Infosys Ltd, Tata Consultancy Services Ltd (TCS) and HCL Technologies Ltd outperformed most analysts’ expectations.
Persistent currency growth remained strong, although the impact of cross-currency headwinds continues. Deal wins and order flows remained healthy, improving the outlook for companies in the second half of FY23 amid slowdown concerns.
“So far, the IT sector started the quarter well with TCS, Infosys and HCL reporting better results than the Street estimates. Aishwarya Dadhich, fund manager, Ambit Asset Management, said, “All of them reported a strong beat on margins with strong topline growth. Mid-sized companies like Mindtree and Cyient also reported better numbers, Dadhich said.
Analysts say easing operational challenges and improving margins remained a major highlight, which helped offset sentiments better than revenue growth. The supply side issues are being resolved.
Margin improvements for most companies in Q2 are attributable to cost optimization, currency depreciation and normalization of sub-contract costs.
High attrition, which continues to be a major concern for investors, is showing signs of easing. Dadhich said that with the easing of supply-side pressures, the first quarter of FY13 is showing an average reversal of job losses, which will significantly aid margin expansion in the coming quarters.
Analysts say that the improvement in the dropout rate will be more visible going forward. The cost of replacement has also fallen. In fact, more employees have been added by companies like Infosys, adding to the positive outlook, said Apoorva Prasad, Institutional Research Analyst, HDFC Securities Ltd.
Analysts say that overall, the outlook for the second half has improved on the back of winning orders, with macro challenges expected to have the biggest impact. Prasad said the factors that contributed to the fall in earnings in the recent past are also improving as margin pressure eases. This is positive and may help sectors achieve better valuation multipliers in the days to come.
“Surprising element HCL and Infosys raised their revenue guidance for FY13. “This is a reflection of optimism on growth despite concerns arising from the possible fallout of the economic slowdown in the US and Europe,” said Dr VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services. Overall the IT majors’ Q2 results were better than Street expectations on most parameters.”
Currency headwinds, however, continued to impact. Analysts said a stronger dollar is positive for the region, but weaker European currencies such as the euro and pound are at least partially curtailing gains.
The currency tailwind is being provided by a stronger dollar even as other currencies weaken. Omkar Tanksale, Senior Research Analyst, Axis Securities, said currency tailwinds have given an 80 basis point positive rub-off. More than 40% of the industry’s revenue is dollar-denominated. However, the low job layoff rate remains a big positive, Tanksley said, as employee costs contribute about 65% of the cost.
The other positive, according to Tuxley, is that demand remains strong and even the European regions have performed well. He said this is an indication of the strength of the business infrastructure of IT services companies.
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