The Q2 results for major Indian IT companies, including Tata Consultancy Services (TCS), Infosys, HCL Technologies, Wipro, and LTIMindtree, have not been well-received by the market. These companies have reported a challenging quarter, citing factors such as a slowdown in demand, macroeconomic headwinds, and weak discretionary spending. Analysts are cautious about the near-term prospects for these IT giants.
While the management of these companies has highlighted their strong deal wins and efficient execution in a challenging environment, brokerages are less optimistic about their ability to translate these wins into substantial growth.
All five IT companies managed to report better-than-expected margins through cost-control measures, employee pyramid rationalization, and improved efficiency. However, this is unlikely to result in significant margin expansion in the near future. Moreover, the weak revenue guidance provided by Infosys, Wipro, and HCL Technologies has added to the uncertainty.
IT stocks have suffered declines following disappointing Q2 results. TCS shares have dropped over 5 percent since October 11, while Infosys shares are down around 4 percent since their Q2 results on October 12. HCL Technologies’ share price has remained relatively stable. Wipro shares plummeted more than 4 percent on October 19, a day after the company released its Q2 earnings. However, LTIMindtree managed to gain more than 4 percent on October 19, with better-than-expected margins seen as a positive surprise by brokerages.
Despite the challenges, the IT companies’ management remains confident about delivering a stronger performance in the second half of the fiscal year, despite ongoing concerns about discretionary spending, uncertainty, and expected higher furloughs in Q3.
Looking ahead, the performance of Indian IT companies is expected to be influenced by the commentary from the Federal Reserve. For those considering a contrarian position in the IT sector, Infosys is considered a more favorable option, according to Shrikant Chouhan, Head of Equity Research at Kotak Securities.
In terms of specific IT stocks, brokerages have varying opinions. Infosys received predominantly positive ratings such as ‘Outperform,’ ‘Overweight,’ or ‘Buy,’ though some have reduced their target prices due to margin pressures and a less robust revenue outlook. TCS, HCL Technologies, and Wipro have largely received ‘Hold,’ ‘Reduce,’ or ‘Equal Weight’ ratings, with some analysts even issuing ‘Sell’ recommendations for Wipro and TCS. LTIMindtree, on the other hand, has received more favorable recommendations, with ‘Buy’ or ‘Add’ calls from analysts.
The overarching theme from the Q2 reports of these IT giants is that macroeconomic conditions remain uncertain. High interest rates and weak consumer sentiment in Western economies have led to a sustained slowdown in discretionary spending, resulting in delayed decision-making and deal conversions. While the AI theme has been discussed by IT management, its impact is not expected to be a short-term game-changer, with positive effects likely to materialize over the medium to long term.
