IT stocks outlook: How should IT stocks perform this earnings season? Manik Taneja responds
Let’s start by talking about ‘numbers, what do you think the street is really paying attention to? What are your numbers for EBIT margin, overall dollar revenue growth?
For TCS, for this quarter we expect sequential CC growth (constant currency) of approximately 3.7%. Cross-currency headwinds will affect reported USD revenue growth by around 150-160 basis points for the NIM and this is the trend you will see across all businesses, but the magnitude will vary depending on the mix. of their foreign currency activities.
From a margin perspective, there will be an impact from salary increases that will begin in the current quarter. Alongside this, across the industry, we will see the impact of travel and installation costs pick up again and as a result, globally, we expect EBIT margins to fall by around 160 basis points on a sequential basis at approximately 23.4% for the quarter.
As for the TCS comments, those are the numbers you talked about. What to pay attention to when management speaks? This will be the first comment of the first quarter, probably the first outlook for the next year after three-four months have passed, so what to pay attention to.
Given that the street has been worried about what’s happening in terms of demand and we continue to hear concerns about the recession not only in Europe but even in the United States, how are customers pivoting in this context ?
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Over the past few months, we’ve had a very mixed news feed. Some of the global tech peers continue to confirm that tech spending remains essentially resilient. In fact, some of the global peers have even raised their mid- to long-term outlook amid the current market volatility.
In the recent past, we have seen Duck Creek downgrade its outlook. For IT services companies, the focus would be on company feedback on the outlook for the second half of FY23? What do they suggest in terms of contracts won and hiring patterns?
Certainly from a hiring perspective, I think we should brace for some normalization in hiring after the record addition we saw in FY22 across the industry .
This is the first time that we have witnessed a real downgrading with regard to IT names. Quarter on quarter, over the past four quarters, stocks have hit new highs and there have been EPS upgrades. How does this put the numbers in context? Are expectations low this time around? Are people neutral to underweight in IT?
First I will give a background. With the fourth quarter results, we expected the upgrade cycle to take a break, or even reverse to a downgrade. After that, over the past two to three months, there have been major currency moves on top of demand concerns.
With the way the cross currencies have given, there will certainly be downward revisions to USD revenue growth estimates across the board. Some of us have already exercised restraint in terms of USD growth assumptions.
From the perspective of earnings or margins, the rupee has depreciated against the dollar, but the rupee has essentially appreciated against other currencies like the British pound or the euro and, as a result, the net flow of real margins to businesses will be minimal. But on a net level, the impact on margins and earnings could be slightly positive due to the way the rupee has depreciated.
What kind of rupee figure would you expect to implement next year? Will it depreciate further? If you’re of the opinion that it will stay where it is, what kind of upgrade would occur based on that?
Our current assumptions stand at around 77 rupees to the dollar, although our internal rupee forecasts also suggest the rupee will drop below 80 rupees to the dollar. We still have to take that into account. But if you look at this industry, a lot of the currency induced gains tend to be passed on to the customer and therefore some of those net level gains are very limited unless the benefits of converting the currency fluctuation does emerge.
I would argue that the currency does not drive a significant upgrade as such in a meaningful way for the sector. The only thing it basically does is it makes Indian IT much more competitive.
Given the current environment where customers globally are facing a high inflationary environment, there is an increased push for optimization which is a generally positive dynamic for offshore IT. But in the past we’ve seen that it usually tends to play with some lag.
I wouldn’t be surprised if business feedback in the current quarter points to a reprioritization of customer spending as customers again look for more savings and that generally tends to play into the advantage of Indian IT companies.
We’ve seen over the last three or four quarters that mid-size IT sure has gone up in percentage due to a weaker base, but some of those names like , the two L&T twins, aren’t small anymore. So do you expect this outperformance to continue?
There is a significant difference in scale between
or TCS against any of these tier two companies. TCS on a quarterly basis generates over $6.5-6 billion in quarterly revenue. The absolute earnings for either of the names you mentioned are probably one-third or probably one-fifth in some cases. There is therefore still a significant difference in scale.
Tier 2 companies benefit from a favorable base over time. Also benefited from the fact that at an industry-wide level, over a multi-year period, deals are split into smaller sizes and therefore not at a disadvantage when it comes to top players plan or scale in terms of competition for this business, I don’t think the dynamic is changing.
The only thing to pay attention to for Tier 2 businesses is if there is still a good concentration of customers. In any mid-cap name, the top 10 clients typically make 40-50% of the revenue, and if they see demand headwinds from a few clients, that tends to translate into fortunes very quickly. financial.