India’s information technology sector clocked better than expected earnings in the September quarter, as the demand momentum remained firm but it’s still too early to celebrate as the outlook remains bumpy.
IT companies reported their second-quarter earnings in the shadow of an impending recession in two of their largest markets–the US and Europe.
Surging interest rates in the US have triggered fears of a recession in 2023, while the European economy is battling one of the worst energy crises in recent memory as winter sets in.
Commentary from the management of most of the major IT players betrayed a level of uncertainty in their assessment of the current demand environment, something not seen in previous earnings calls.
“I see a certain level of uncertainty today. There's a bit of uncertainty, because, in talking to clients, they all are assuming that at some point in time, this (recession) will have some implications for them,” Wipro’s Chief Executive Officer (CEO) Thierry Delaporte told analysts in a conference call in October.
While Infosys raised the lower band of its sales growth guidance for 2022-23 and recorded stellar deal wins in the September quarter, CEO Salil Parekh also hinted at emerging undertones of caution among clients.
“While the overall demand environment continued to be healthy, we also see signs of cautious behaviour by clients due to macro concerns,” Parekh told analysts.
In the September quarter, revenues of 36 companies, part of the BSE IT index, grew 5 percent quarter-on-quarter, reflecting firm demand conditions.
The net profit and operating profit of BSE IT index constituents rose 8 percent each, according to data available on AceEquity.
According to brokerage firm Motilal Oswal Financial Services, the revenue growth of information technology companies in the September quarter was 50 basis points above what analysts expected.
One basis point is one-hundredth of a percentage point.
Similarly, the operating profit and net profit of IT companies that reported their second quarter earnings, so far, were also above the Street’s expectations.
The Nifty IT index has risen over 5 percent since the beginning of the earnings season on October 10.
Caution ahead
Analysts are expecting a slowdown in revenue growth and large deal wins for the sector as clients in the US and Europe turn the screw on spending on IT-linked services.
They foresee some improvement in margin performance in the coming quarters as staff compensation normalises amid slow hiring and benefits from the depreciation of the rupee against the US dollar.
“Companies with stronger guidance on outlook and facing the same price brunt might have an investible opportunity but next two quarters will remain cautious for the IT industry,” said Amit Doshi, portfolio manager at CARE PMS.
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