TCS, Infosys, Wipro: Will Q1 results disappoint equity investors again?

The information technology (IT) sector underperformed the benchmark equity indices on Dalal Street during the April-June quarter as weak discretionary spends amid elevated interest rates continued to dampen market sentiment. The BSE IT index rallied 3.67% during the first quarter of FY25, while the BSE Sensex gained 7.3%. Now all eyes are on the forthcoming quarterly results, with IT major Tata Consultancy Services set to announce its results on July 11, followed by HCL on July 12.

Market watchers believe that margin performance is likely to be mixed depending on the wage-hike cycle, higher travel costs and transition costs of large deals. Commentary on recovery in demand will be keenly watched to gain confidence in sustainable improvement in the YoY revenue growth trajectory. Market participants should also zero in on demand trends in key verticals of BFSI, retail, manufacturing, communications and Hi-Tech.

Deal intake and pipeline, attrition and hiring trends, progress on Gen AI, pricing environment and impact of insourcing/GCC on growth should be watched.

According to Emkay Global Financial Services, large deal announcements reflect some moderation in deal wins in Q1. “Going ahead, we believe the interest rate cuts will act as a trigger for revival in discretionary spending and an uptick in technology spending. Nifty IT underperformed the broader market by 4% over a period of three month due to delayed demand recovery,” Emkay Global said in a report adding it continues to prefer large caps over mid-caps. In the IT space, Emkay’s pecking order is Infosys, HCL Technologies, Wipro, Tech Mahindra, TCS and LTIM in large caps.

An assessment by Emkay showed that TCS may report 1.6% YoY and 3.5% QoQ growth in revenue for the quarter ended June 2024. On the other hand, it sees a 4% drop in net profit of TCS on QoQ and an 8% rise on a YoY basis.

“We build in a 1.6% QoQ revenue growth in dollar terms after factoring 40bps cross-currency headwinds. We are building an incremental 0.4% QoQ contribution ($30mn) from the BSNL deal. EBIT margin is likely to decline by 150bps QoQ due to wage hikes,” Emkay said.

The brokerage sees 2% QoQ and 8% YoY revenue growth in the Infosys case. However, it sees a 22.4% QoQ fall in the net profit of Infosys in Q1FY25 and a 4.1% rise on a YoY basis. It also believes that Wipro may post a 5.4% QoQ and 4.1% YoY rise in net profit despite a 0.2% QoQ and 4.5% YoY fall in revenue in the June quarter.

However, Motilal Oswal Financial Services said, “We are on track for one of the weakest first quarters for at least 10 years. The situation, though slightly better, is eerily similar to what we witnessed in H1FY24. We would be looking for signs of recovery in discretionary spending in the form of deal activities, which have been heavily skewed towards cost-takeout projects. However, any disappointment in Q1FY25 could again put pressure on Q2.”

Sharing its projection on Q1 results, brokerage Prabhudas Lilladher said that within Tier-1, it expects Infosys to outpace its peers with 2.2% QoQ CC growth, followed by LTIM and TCS at 1.9% and 1.4% QoQ CC, respectively. In contrast, HCL Technologies and Wipro are expected to post 1.8% and 0.5% drop in revenue. Wipro may see 0.3% revenue growth on QoQ basis.

“Margin recovery is likely to be stable with median margin improvement of 20 bps QoQ. Compensation revision at TCS in Q1 will lead to an EBIT margin decline of 110 bps QoQ, while HCL Technologies is expected to report a margin decline of 70 bps due to missing operating leverage and weakness in high-margin business,” Prabhudas Lilladher said.

Prabhudas Lilladher added that the anticipated recovery in operating performance for Tier-1s in Q1 has led to marginal re-rating across the board.

“We would wait for a more consistent and constructive recovery in the overall demand trend. At the same time, Tier-2 operating performance is expected to be in line with Tier-1 names. As a result, the valuation gap between them has reduced and achieved parity with a marginal premium of 5%. We remain selective on Tier-1 names that have a diversified business mix and strong ability to capture the current enterprise spends,” the brokerage said in a report.

It has an ‘accumulate’ rating on TCS and LTIM with a target price of Rs 4,360 and Rs 5910, respectively. On the other hand, Prabhudas Lilladher holds a ‘buy’ call on HCL Technologies with a target price of Rs 1,680.