Indian IT services companies are bracing for a weak fourth quarter.
The Top 4 IT companies, TCS, Infosys, Wipro and HCL saw their margins improve in the third quarter of FY23 as attrition levels dipped on a quarter-on-quarter basis. This recovery started in Q2FY23. They bagged large deal wins during the third quarter. HCL Tech won 17 large deals during the quarter, with new deal wins at $2.35 billion, up 10% YoY. Infosys won large deals worth a total contract value (TCV) of $3.3 billion, the highest in the last 8 quarters.
TCS, Wipro and HCL saw their margins grow to 24.5 per cent, 16.3 per cent, and 19.6 per cent, respectively. Infosys reported stable margins at a quarter-on-quarter level of 21.5 per cent. While the gains are good, the numbers are not higher than the margins reported in Q3FY22 for most IT companies.
TCS reported a constant currency revenue growth of 2.2% quarter-on-quarter and 13.5% year-on-year, respectively. “Moving to the operating margin, we had 70 basis points benefit from the currency movement. Operational rigour, including utilisation, and reduced use of subcontractors, resulted in a net benefit of 0.3 per cent or 30 basis points, offset by a 50 basis points headwind from higher third-party expenses and increasing cost of return to normalcy,” says Samir Seksaria, Chief Financial Officer, TCS.
Similarly, Infosys posted a constant currency revenue growth of 13.7% year-on-year and 2.4% sequentially for the December quarter. The third quarter is considered seasonally weak due to furloughs or lesser number of working days because of the holiday season.
“Infosys’ management is witnessing pockets of weakness in some key industry verticals owing to global slowdown and there are also growing uncertainties in Europe and the US. We believe uncertain global macro environment will reflect in earnings volatility in FY24 and could restrict material outperformance in near to medium term. Nevertheless, given Infosys’ strong track record and standing in global IT arena, the long-term growth outlook remains intact,” said Sanjeev Hota, head of Research, Sharekhan by BNP Paribas. Although Infosys slightly raised its FY23 revenue growth guidance to 16-16.5% from 15-16% earlier, analysts said it is an indication of a tepid fourth quarter with a sequential growth of -1.1-0.5%.
“At Infosys, despite strong TCV, hiring has been lower which suggests that there could be some moderation on revenues in the medium term,” ICICI Securities said.
HCL Tech reduced its revenue growth guidance for the current financial year to 13.5-14% in constant currency from 13.5-14.5% earlier. The company also lowered its operating margin guidance to 18-18.5% from 18-19% earlier.
Wipro expects a revenue growth of -0.6-1% sequentially for the fourth quarter ended March as deal wins and client decision-making are slowing down.
Attrition continues to moderate. This trend also started last quarter. All four companies have seen their attrition numbers decrease to 21.3 per cent (TCS), 21.7 per cent (HCL), 24.24 per cent (Infosys) and 21.2 per cent (Wipro). Attrition numbers are still high on a year-on-year level, as much as 6 per cent higher than the same time last year in TCS’ case.
The number of people added came down significantly at these companies, indicating lower demand. Growth in net addition of employees is an indicator of strong business outlook.
TCS saw its headcount decline on a q-o-q basis, as it saw a reduction of 2,197 employees amid a cautious demand environment. This is the first time the net addition has declined in 10 quarters. A contraction in the net addition of employees was previously seen during the first quarter of FY21 during the peak of the pandemic.
Wipro also saw a headcount reduction of 435 employees during the third quarter. HCL Tech’s net hiring more than halved as it made a net addition of 2,945 employees in the December quarter, down from 8,359 in the previous quarter.
Top IT CXOs have indicated that attrition will likely trend down in the subsequent quarters.