The earnings season for the second quarter of the Indian IT sector begins next week. Tata Consultancy Services (TCS), the country's largest IT services company, will take the lead, announcing its results on October 10, followed by Wipro and HCLTech on October 12, and Infosys on October 13.
Most of them had a strong total contract value (TCV) and demand pipeline last quarter, but a lot is expected to be revealed this quarter. Especially, addressing several supply-side problems, such as not hiring new people who had been given offer letters, variable pay cuts and delays, client spending budgets going down, etc.
TCS CEO Rajesh Gopinathan stated last quarter that he expects the demand pipeline to remain strong in Q2, but that he will be wary of the macro-environment. Since then, a lot has changed.
We look at the top five things to keep an eye out for:
Revenue growth
Despite macroeconomic uncertainties in Europe and the United States, their key markets, and impending recessionary pressures, TCS is expected to post similar revenue growth to the previous quarter. Analysts expect revenue will increase by 1.2-1.7 percent in USD terms and 3.5-3.8 percent in constant currency terms, reaching an estimated Rs. 54,766 crore.
Cross currency headwinds
The depreciation and volatility of the rupee are one of the main worries in the industry right now. The value of the British pound and the Euro has dropped by nearly 10 percent since the end of the previous quarter, with the yen and the Australian dollar making matters worse. Volatility in currency can significantly impact Q2 performance as well as Q3FY23E.
“For tier-1 IT, we are building CC growth moderation to 13 percent for FY23E (~400bps negative cross currency impact) and 10 percent CC growth for FY24E (~1% negative cross currency impact) as compared to 18 percent growth registered in FY22,” analysts at HDFC Securities said in their report.
Demand remains resilient
Despite the macro challenges in Europe, TCS' contracting activity was strong, with some of the key deals including Marks & Spencer, Nokia, Boots, Zurich Insurance, and, according to media reports, a $2-billion BSNL deal.
However, Gopinathan's comments on client spending trends and demand expectations for the coming quarters will be worth noting. Especially since the retail industry and the BFSI sector - two of TCS's strongest segments - have been particularly hit and have experienced a slowdown in recent months.
Fresher hiring
The last quarter saw the IT sector's strong hiring narrative starting to crumble. TCS had already reported a slowdown in new hires in the first quarter of FY23, with around 14,000 compared to 24,000 in the same quarter last year and 35,209 in Q4FY22. The company then stated that it is now working to increase its utilisation rates.
However, despite offer letters being rolled out at major companies such as Wipro, Infosys, and Tech Mahindra, fresher onboarding has been delayed for months, and in some cases offers have been revoked, indicating an increasingly difficult business environment and an attempt to cut costs.
Meanwhile, variable pay was also either delayed or partially reduced for companies such as TCS, Wipro, and Infosys.
US visa crisis
Indians currently account for nearly 75 percent of all H-1B visas issued each year. The specialised non-immigrant visa allows employers to bring in technically skilled workers from other countries. Given the sheer volume of requests and the two years of uncertainty and travel restrictions caused by the pandemic, the visa approval timeline has now increased by over 400 days, and in some cases by 800 days.
This makes it difficult for IT companies to send employees to sites overseas. Analysts told Moneycontrol that this will keep subcontracting costs high in the near-term, at least until Q3.
Last quarter, TCS chief financial officer, Samir Seksaria, said, “Our subcontractor expenses currently are at 9.7% of our revenues, and have moved up from about 7% levels to where we are currently. And as Rajesh pointed out, we have proactively and strategically invested in creating a bench. Our current priorities are to stay focused on capturing the demand. And we have known how to balance on the subcontractor side. And as the need arises, we'll be able to realign it or balance it.”
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