What should you expect from IT majors' Q2-FY23 earnings?

IT major Tata Consultancy Services will kick off the September quarter earnings season today. Wipro and HCL Tech will announce their numbers on October 12, followed by Infosys on October 13.

Despite lingering fears of a recession in the West, analysts expect the IT pack to report decent revenues this quarter supported by firm digital spending and deal wins.

They expect margin pressures to continue in Q2 due to wage hikes and back-to-office costs. Attrition rate, on the other hand, should start to come down as the macro-environment gets impacted.

Total Contract Value (TCV) is a SaaS metric that measures the total revenue from a particular contract or customer, including recurring revenue and other fees 

More importantly, analysts expect total contract value (or TCV) would be softer, as no large deals have been signed during the quarter.

Nirvi Ashar, Fundamental Analyst, Religare Broking says IT companies to perform better in Q2 despite macro concerns. Large-caps could post 2-2.5% QoQ revenue growth in CC terms. Midcaps could post 3-6% QoQ revenue growth led by deal wins. Margins may fall up to 80 bps, but likely to improve after Q3

Sharing similar views, Omkar Tanksale, Senior Research Analyst at Axis Securities believes that IT spends and demand for digital initiatives have been resilient in the recent quarters.

Omkar Tanksale, Senior Research Analyst, Axis Securities says IT spends from North America, Europe likely to have been strong. Demand for digital, cloud transformation to have been intact. Do not see any spending cuts in Q2 from large clients. Margin pressure to be offset by rupee weakness, moderation in attrition. 

From large companies, Kotak Institutional Equities expects Infosys to be the lead winner with a 4.7% sequential revenue growth in CC terms, followed by Wipro, TCS and HCL Tech.

Among mid-tier firms, Mindtree is likely to be the top performer with a 5.5% sequential revenue growth, followed by L&T Technology Services, LTI and Mphasis.

Meanwhile, on the bourses, the Nifty IT index is down 28% for the year while the Nifty index is nearly flat.

The correction has largely been due to the de-rating of valuation multiples, experts believe, but they do not see more downside potential for the same.

According to HSBC Global, “Valuations now look reasonable, broadly in line with five-year averages and the market. So unless key markets like US and Europe suffer prolonged recessions dragging Indian IT growth to mid-to low-single digits, the valuation downside risk looks limited. Hence, we expect IT stocks to compound with earnings.”

The US monthly jobs data is likely to sway market mood today, as the Street will track global cues, along with rupee levels against the dollar.