The third quarter seems to be moderate in growth for the IT industry. The good news, however, is the rupee depreciation and moderation in attrition improving margins sequentially.
Macroeconomic and geopolitical uncertainties, cautious clients that are deferring spending decisions, furloughs, and a lesser number of working days are going to take a toll on the IT industry in the quarter, according to analysts at Emkay Global Financial Services.
It expects revenue growth of 0.8-3.7 per cent in constant currency quarter on quarter for tier-1 companies and -0.4 per cent to 3.4 per cent for mid-cap companies.
Analysts at Motilal Oswal Research have felt that the weakening macros and recessionary fear have had a lesser adverse impact on the overall demand environment than was anticipated at the beginning of the quarter.
“However, there are some pockets of weakness remaining in the consumer-facing verticals, where the decisions have been delayed and the spending have has been cut on the discretionary activities,” they said. “Our recent conversations with the management of tier-1 companies, indicated a limited adverse impact on demand although there will be softness in specific verticals (mortgage, retail, telecom, and hi-tech) and geography (Europe).”
Growth forecast
Despite the hurdles, the revenue growth of tier-1 companies should be ranging between 1 per cent and 5 per cent quarter on quarter. The tier-2 players are expected to grow between –4.5 per cent and 11.7 per cent.
Emkay Global, in its report on the analysis of a few companies, said Infosys is likely to retain its 15-16 per cent revenue growth and 21-22 per cent EBIT margin for the financial year 2022-23.
It also expected HCL Tech to retain its 13.5-14.5 per cent revenue growth and 18-19 per cent EBIT margin guidance. “Deal intake is likely to reflect the elongated sales cycle,” it said.
Operating efficiencies
Emkay Global said rupee depreciation and moderation in attrition would help improve the margins of the industry sequentially.
“EBIT margin is likely to expand by 20-100 bps sequentially for tier-1 companies and 20-50 bps for tier-2 companies on account of operating efficiencies, rationalisation of employee pyramid, moderation in attrition, and rupee depreciation,” it said.
The EBITM has a further scope of upside in Q4 FY23 for most companies on account of the flattening employee pyramid, better utilisation, and weak rupee.