The biggies of the information technology (IT) sector have come out with their performance numbers for the June quarter. But what do the combined results show?

#1: Margin misses across the board

The first biggest takeaway is that margins have missed the mark across all the large-cap IT companies, led by high supply pressure, wage hikes for Tata Consultacy Services (TCS) and Infosys, rising sub-contract costs, and reversal of travel/facility cost savings.

Also Read: Infosys surprises the Street with higher revenue guidance but margin falls short of estimates

For Infosys and Wipro, the margins are at historical lows, while for HCL Technologies and TCS they are at a 10-year-low and 14-year-low, respectively. The quarter-on-quarter decline in margins is in the range of 100-200 basis points. For HCL Tech, which reported the sharpest margin contraction of 200 basis points, there was no wage hike this quarter.

#2: Deal wins subdued

The second takeaway is that deal wins, which are seen as a proxy for future growth, were also subdued. TCV (total contract value) of deals, particularly for Infosys and TCS, were disappointing. The deal wins in the June quarter for Infosys were the lowest since the June quarter of FY21.

Even if we look at over 12 months to iron out the volatility, the deal wins on a trailing 12-month basis at $8.6 billion was down 43 percent over the 12 months ending in June 2021. For TCS, deal wins were down 27 percent quarter-on-quarter and just one percent year-on-year.

# 3: Revenue outlook still promising, but managements note the caution in client conversations about the macros

The third takeaway is this quarter, where revenue performance was fairly in line, with no negative surprises, Infosys managed to report the beat with the highest growth of 5.5 percent in the large-cap pack, and the outlook is still promising despite deteriorating macros.

Infosys raised FY23 revenue guidance to 14-16 percent while Wipro's second-quarter guidance is healthy at three to five percent. Also, the IT firms' managements have highlighted that CEO/COO discussions suggest clients are watching the macros, there has been no impact on the business yet, and no project cancellation or deferment of spending.

#4: BFSI growth lower than the company average

The fourth takeaway is that the growth in BFSI (Banking, financial services and insurance) was lower than the company average for both Infosys and TCS.

Also Read: Tech Mahindra likely to report 20% fall in profit as margin slumps by 170 basis points

Infosys and Mphasis have cited caution in the mortgage business due to rising rates. The segment to watch will be the mortgage business, which gets impacted by rising rates.

#5: Midcap IT fared better than large-caps on revenue + margins

And finally, midcap IT performance was better than large-caps. Mindtree, Larsen & Toubro Infotech (LTI), Mphasis margins beat consensus and revenue growth was persistent was super intense.

The question on midcap margins is can they be immune to margin pressures when the large-cap co-IT has been hit?

First Published:Jul 25, 2022 1:03 PM IST