Earnings season is back. Just as the drill is, the December quarter earnings will begin with technology names next week. Tata Consultancy Services reports results on January 9, followed by Infosys and HCLTech on January 12 and Wipro on January 13th.

Here's the big question, is the slowdown easing or worsening? More importantly, is the slowdown priced in the share prices of these companies after the Nifty IT index witnessed its worst annual performance since the global financial crisis of 2008?

Let us tell you what we can learn and hope to learn in this quarter's results and commentary from the companies.

This quarter is typically a seasonally soft quarter considering the holiday season in key geographies and even in India. However, growth is likely to further moderate this quarter due to the higher furloughs. Remember, HCL Tech at its analyst day recently warned that there have been higher furloughs in hi-tech, BFSI and the telecom verticals.

A CNBC-TV18 poll expects India's top five IT companies to report revenue growth between 0.5 to 3.5 percent in US Dollar terms. However, that is much lower than the growth reported in the same quarter last year.

Growth slowing down is certain. But what apart from that do we want to hear from the management to understand the demand outlook? Here are a few questions:

Will furloughs continue into Q4?

How are tech budgets shaping up for CY 2023?

If tech budgets are flat and not growing and large deals are absent, can IT companies see double-digit growth next year?

Is there moderation in the deal win outlook? and lastly

How are pricing and hiring numbers shaping up, which in a way, are proxy for future demand.

On the margin front, the CNBC-TV18 poll expects margins to improve for the second straight quarter, courtesy a weak rupee and declining attrition. TCS may report a 70 basis points expansion in EBIT margin, while that for Infosys may rise 30-40 basis points.

Although there is improvement in the margin picture, IT bears say that these figures are still 200-600 basis points away from their post-Covid peaks. Remember, in the immediate aftermath of the pandemic, IT companies cut back on salary, travel costs went to zero, which resulted in a surge in margins.

Two pertinent questions on the margin front:

Is there scope to improve margins given the fact that attrition is on the decline?

or will lower growth offset margin improvement as operating leverage is needed for better margin

On to guidance, Infosys and HCL Tech are expected to retain their revenue and guidance. HCL Tech guided for growth to be at their lower end of the guided revenue band. Wipro's guidance for the next quarter is expected to be muted.

As we have been saying, the question is on future demand for financial year 2024 and 2025 and the results this quarter are unlikely to give a strong, qualitative signal on the outlook for the next financial year.

Lastly, on stock prices and valuations - The Nifty IT index has underperformed the Nifty 50 for two consecutive years only once in the last 15 years. With the underperformance in 2022 done, does this support a reversal in the new year? Can the Nifty IT stage a recovery? Or given the fact that despite the 30 percent correction, valuations are still at a premium of nearly 30 percent to historical average, will result in them correcting to pre-Covid levels?

Brokerage firm Nomura expects the strongest quarter-on-quarter growth from HCL Tech within the largecap IT space while the weakest may come from Tech Mahindra. Within the midcap space, Persistent Systems may have the strongest sequential growth while Mphasis may witness the weakest growth.

The firm also sees further downside risks to the consensus revenue growth forecast for financial year 2024.

Motilal Oswal also expects HCL Technologies to lead the largecap IT space with a revenue growth of 5 percent from the September quarter on a constant currency basis. On the other hand, it expects Wipro and Tech Mahindra to have a muted quarter. Within the midcaps, it expects Cyient's topline to grow 11.7 percent sequentially boosted by recent acquisitions.

First Published:Jan 6, 2023 10:02 AM IST