Why investors dumped IT stocks ahead of TCS earnings?
3 min read . Updated: 11 Apr 2023, 06:00 PM IST
Premium- The IT sector is expected to report a seasonally weak quarter in Q4FY23.
- TCS will announce its Q4 results on April 12 followed by Infosys on April 13. Others will follow suit.
- TCS dipped overall by 2%, while Infosys almost neared its 52-week low.
IT stocks are under pressure on Tuesday ahead of TCS' fourth quarterly earnings. Overall, on the day, TCS dipped over 2%, while rival Infosys almost neared its 52-week low levels and has slumped by nearly 3%. HCL Tech, Wipro, and Tech Mahindra among others are also in the red. The sector is in focus as TCS will kick start the Q4 earnings season tomorrow followed by other peers.
At the time of writing, the BSE IT index traded at 28,541.03 down by 255.17 points or 0.89%. TCS and Infosys plunged by 1.4% each.
However, TCS has dived by 2.2% in the trading session and Infosys tumbled by 2.7% with an intraday low of ₹1,389 apiece --- which is a couple of rupees away from its 52-week low of ₹1,355.50 apiece.
After TCS' Q4 earnings, Infosys will present its financial results on April 13.
Other major stocks were also bleeding-- HCL Tech dipped by 1.2%, while Tech Mahindra and Wipro shed nearly a percent. L&T Technology Services and Coforge also slipped by 1.4% and 1.5%. LTI Mindtree was lower by over 0.5%. Persistent Systems also plummeted by over 1%.
The IT sector is expected to report a seasonally weak quarter in Q4FY23.
ICICI Direct expects IT companies to post QoQ constant currency revenue growth between -1% and 2.5% for Q4FY23.
In Tier 1, among IT firms, the brokerage expects TCS, Infosys and HCL Tech (IT services) to post a muted QoQ CC revenue growth of 1%, 0.5% & 1% QoQ, respectively, while Wipro is expected to report a QoQ revenue decline of 0.5%.
Among tier II IT companies, the brokerage expect LTIMindtree and Coforge to report a steady QoQ CC revenue growth of 2% & 2.5%, respectively, while Tech Mahindra’s revenue is expected to decline by 1%.
In rupee terms, the brokerage expects TCS, Infosys, and Wipro to report QoQ growth at 0.5%-1.9% while HCL Tech is expected to report a 0.7% QoQ revenue decline at the company level. Among Tier-II IT companies, it expects Tech Mahindra to report flattish revenue growth while LTIMindtree & Coforge are expected to report growth of 2.9% & 4.2%, respectively.
Further, in the case of margins, majority of the IT companies are expected to report muted growth due to headwinds such as lower revenue, which despite some cost optimisation levers will impact margins for the quarter.
In Tier 1, expect moderate EBIT margin expansion of 20 bps for TCS while Infosys, Wipro & HCL Tech are expected to report a margin decline between 20 and 140 bp. In Tier II, expect the EBITDA margin to decline 10 bps for TechM while LTIMindtree & Coforge are expected to report margin expansion of 170 bps & 120 bps, respectively. LTIM’s margin was hit by 100 bps one-time integration costs in Q3, which was non-recurring while for Coforge, cost rationalisation at its BPO business is likely aid margin expansion.
During the quarter, the brokerage believes that the key thing to watch will be the outlook for FY24 revenue & margins with comments of the companies for the outlook of tech spending in the BFSI space amid current events in this sector.
TCS which is currently the talk of the town ahead of its Q4 earnings on April 12, is expected by ICICI Direct to miss target exit EBIT margin range of 25% as lower growth would be an additional headwind.
Further, the Tata Group-backed company is expected to likely see a moderation in the quarter in regards to BFSI as a vertical and US as a geography.
TCS will be considering interim dividends as well. Buzz is that it will be keenly watched if there is any buyback from the company as well on Wednesday.
Infosys will announce its Q4 results on April 13th, followed by Cyient and HCLTech on April 20. While L&T Technology Services on April 26th, while Tech Mahindra and Wipro on April 27th.