Information technology stocks were the biggest drags on the market on July 21 after a raft of disappointing numbers from Infosys and other players highlighted the stiff near-term challenges confronting the IT segment.
Infosys plummeted 10 percent in early trade after India’s second-largest IT services firm not only missed earnings estimates but also slashed its revenue growth guidance for the current fiscal to 1-3.5 percent from 4-7 percent.
It cited a challenging macroeconomic environment as the reason behind the cut in guidance.
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The financials
The company reported an 11 percent YoY increase in its net profit to Rs 5,945 crore, while revenue climbed 10 percent to Rs 37,933 crore. Operating margin came in at 20.8 percent, down from last quarter’s 21 percent.
Salil Parekh, CEO and MD of Infosys, said the company is seeing clients either stopping or slowing down transformation programmes and discretionary programmes, particular in financial services, mortgages, hi-tech, telecom, and retail.
Also Read: Infosys nosedives 10% on sharp guidance cut; fuels brokerage downgrades
Analysts' views
He added that deal signings and start dates have been delayed, and a lot of the revenue from the larger and mega deals will be seen only towards the later part of the financial year. A combination of both is why, Parekh said, the company slashed its revenue guidance for the year.
Macquarie downgraded the stock to 'underperform' as it was disappointed by the IT behemoth's deal wins in Q1. The foreign brokerage was also skeptical of Infosys winning a fair share of outcome-oriented managed services deals in the coming quarters.
Nomura was another brokerage that downgraded Infosys to 'reduce' along with a cut of nearly 1 percent in its target price for the stock to Rs 1,210.
JPMorgan, on the other hand, said the sharp guidance cut brings a welcome dose of realism, which should be extended to the valuation of Infosys. The firm expects the miss on net profit and guidance cut to have a bearing on the valuation of Infosys in the short-to-medium term.
IT sector bellwether TCS dropped nearly 2 percent to Rs 3,393.50, while Wipro was trading with cuts of 2.40 percent at Rs 407.30 in afternoon trade.
Last week, TCS reported a 16.8 percent increase in net profit on a year-on-year (YoY) basis in the quarter ended June 30, 2023, driven by a strong growth in total contract value (TCV) deal wins despite a tough business environment.
Consolidated revenue for the quarter came in at Rs 59,381 crore, marking an on-year rise of 13 percent. In constant currency terms, the revenue grew by 7 percent YoY.
The numbers were in line with the muted estimates. Sequentially, the country's largest software services exporter grew by a modest 0.4 percent, which is its slowest growth in the last 12 quarters. The net profit declined by 3 percent as against the March quarter.
Wipro had reported an 11.9 percent year-on-year (YoY) growth in net profit in the first quarter at Rs 2,870 crore. Sequentially, however, net profit was down by 6.6 percent due to decline in all major financial metrics.
Revenue for the quarter grew 6 percent YoY at Rs 22,831 crore as compared to Rs 21,528 crore in Q1FY23, missing estimates of Rs Rs 23,014 crore.
Mid-Sized Pack
The weak operating environment has weighed on mid-sized IT firms as well.
Mphasis shares slipped nearly 1 percent in early trade after the company’s revenue fell 4.6 percent YoY to Rs 3,252 crore in the quarter ended June, while net profit declined 1.2 percent to Rs 396 crore from Rs 401 crore in Q1 FY23.
The firm said there was a short-term impact on performance due to weakness in banking sector as well as pressure on discretionary spends.
Persistent Systems tumbled more than 4 percent after the Pune-based IT company reported a 9-percent sequential fall in net profit at Rs 228.8 crore for the quarter ended June.
At 11.45 am, the stock was quoting at Rs 4,832.85, down 4.16 percent from the previous close. Trading volumes at 4 lakh shares were slightly above the 1-month average volumes.
Persistent Systems' revenue in rupee terms grew by 3 percent QoQ to Rs 2,321.2 crore and topline in dollar terms also increased by 3 percent to $282.90 million for the quarter. Both the topline and bottomline numbers missed Street estimates.
The EBIT or operating margin declined to 14.9 percent in Q1, missing estimates of flat margins of 15.4 percent reported last quarter. Persistent had earlier said that it expects to improve margins by 200-300 basis points over the next two-three years.
Similarly, Coforge shares dropped 2 percent after the IT firm’s revenue increased 2.4 percent sequentially for the April-June quarter to USD 271.8 million. Coforge saw its revenue grow 2.7 percent in constant currency terms, lower than the expected 3.5 percent sequential growth.
The mid-cap IT services player, however, reported a 43.9-percent jump in its net profit to Rs 165.3 crore, as the company had to provide for an exceptional expense of Rs 52.3 crore in the March quarter.
The company also saw a miss on its operating margins, as it was down 400bps primarily on account of a pickup in hiring, salary hikes, bonus payouts, and visa costs.
As per analysts, the key stumbling block for the entire sector currently is the recessionary headwinds in Europe and US – the bread-and-butter markets for domestic IT players.
“We expect macro-related uncertainty, likely slowdown in tech spends and supply-side pressure to impede growth in the near-term at least in 2 more quarters,” brokerage Ashika said in a recent note.
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