Shares of Tata Consultancy Services (TCS) and HCL Technologies remained in focus on Wednesday as IT heavyweights will kick off earnings season by releasing their financial results for the first quarter of the current fiscal today. Both the stocks traded flat with negative bias in early trade, in an otherwise positive broader market, as investors turned cautious ahead of their June quarter earnings reports.

TCS shares opened marginally higher at ₹3,275.15 against the previous closing price of ₹3,271.85 on the BSE. In the first two hours of trade so far, the share price of the country’s most valued IT firm touched a high and low of ₹3,290.35 and ₹3,263.75, respectively. The market capitalisation stood at ₹11.95 lakh crore, with 13,000 shares changing hands compared to a two-week average volume of 59,000 stocks.

In a similar trend, HCL Tech shares were down 0.1% at ₹1,113.50 after opening higher at ₹1,117.05 against Tuesday’s closing price of ₹1,114.70 on the BSE. In opening trade, the stock gained as much as 0.4% to hit a high of ₹1,119.50. On the volume front, 0.34 lakh shares changed hands compared to a two-week average of 0.53 lakh stocks, while the market capitalisation was at ₹3.03 lakh crore.

Meanwhile, the BSE IT index was also reeling under pressure with most of sectoral heavyweights such as Infosys, Wipro, LTIMindtree, and Tech Mahindra floating in negative terrain in the range of 0.5% to 2%.

According to market analysts, IT companies are likely to report sequential revenue growth in constant currency (cc) terms in the range of -2.4% to 4% due to soft demand outlook with limited large deal ramp ups during Q1 FY24.

“Our BUY rated TCS, INFY and Persistent are expected to grow at 0.2%, 0.8% and 3% QoQ in CC terms, respectively. On the other hand, our SELL rated TechM would have the weakest sequential revenue growth at -2.4% in CC terms due to sharp weakness in communication, media and entertainment verticals along with soft orderbook,” says ICICI Securities in a report.

“REDUCE rated Wipro is likely to grow its revenue at -1.6% QoQ CC. We expect EBIT margins to be largely flat for most IT companies except TCS, which has announced wage hike starting April 1, 2023, it says.

As per the agency, there is a heightened risk to the top end of Indian IT companies’ revenue growth guidance for the current fiscal amid macro headwinds in key industry verticals like banking and hi-tech, and in key geographies like U.S. and Europe, Adding to it, persistently high interest rates and inflationary pressure have delayed discretionary technology demand. “There is a higher level of scrutiny around each deal due to which pipeline to conversion is taking longer than usual and in certain cases orderbook to revenue conversion is also slow,” the report highlights.

TCS, the country’s largest software exporter, is projected to report flat earnings sequentially in constant currency (cc) terms for the June 2024 quarter amid persistent macro uncertainties. 

Domestic brokerage firm Motilal Oswal Financial Services expects TCS to report revenue growth of 0.7% on a sequential basis to ₹59,600 crore in Q1FY24. The net profit, however, is seen falling by 4.6% sequentially to ₹10,900 crore. On the operational front, EBIT is estimated to drop to ₹13,800 crore, while EBIT margin is likely to contract to 23.1% from 24.5% in Q4FY23. The wage hike and cut in discretionary spending in the backdrop of project cancellations and postponements are likely to impact margins.

Investors will also keep an eye on management’s commentary on earnings guidance for the year, demand outlook, as well as hiring strategy amid fragile global economic environment.

ICICI Securities expects HCL Tech to report weak earnings in Q1 FY24 with flattish sequential growth in CC terms, given the pressure in ER&D vertical and weak seasonality in the IT services segment in any June quarter due to annual productivity benefits passed on to certain large customers.

“We now expect HCLT to report 6.5% YoY CC revenue growth in FY24E, at the lower end of its revenue growth guidance of 6-8%. We expect its EBIT margin at 18.1%, 10bps lower QoQ due to limited operating leverage and no wage hikes in Q1FY24,” it says.

The brokerage house has given “ADD” rating on HCL Tech with 9% potential upside, citing that the stock is likely to be the fastest growing IT services company among its largecap peers in FY24E. “With stock trading at 17.5X FY25E, at a significant premium to its last 15-yr average of 14.6X, we see limited further re-rating potential in HCL Tech.”

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