IT Q4 results preview: Here’s what analyst expects from Infosys, Wipro

Domestic bourses are likely to face a litmus test in April with the beginning of corporate earnings season that is expected to be dominated by elevated inflation, higher interest rates, reduced investment, and economic disruptions caused by geo-political tensions. India's second-largest IT services firm Infosys is set to kickoff fourth quarter earnings by reporting its financial results for the January-March quarter on April 13. IT bellwether Tata Consultancy Services (TCS), Wipro, HCL Tech, Tech Mahindra, and others will also release their results in due course.

According to analysts at ICICI Securities, there will be no change in relative positioning despite worsening macros as it has not translated to client cutting spending on existing projects. Ahead of Q4 results, the brokerage house has upgraded Infosys rating to “Buy” and revised upward the 12-month target price to ₹1,759 from ₹1,772 estimated earlier, implying 28% potential upside. Meanwhile, the agency has maintained “HOLD” on Wipro with a 12-month price target of ₹355 from ₹410 projected earlier.

Here's what analysts at ICICI Securities expect from Infosys and Wipro in the forthcoming earnings season.

Infy’s revenue growth to be soft at 0.1% QoQ

ICICI Securities expects Infosys’ revenue growth to be soft at 0.1% on quarter-on-quarter (QoQ) in constant currency (CC), citing that the fourth quarter is a seasonally weak quarter for the country’s second-largest software company. This will translate to 16.4% year-on-year (YoY) CC growth in FY23E, which is within the company’s guided range of 16-16.5%.

“We estimate 110bps cross-currency tailwinds in Q4FY23. We model 21.5% EBIT margin, flat QoQ in Q4FY23 and 21.2% in FY23, in line with management commentary of achieving margins near the lower end of guidance of 21-22%,” the brokerage said in a report.

The agency expects the Bengaluru-headquartered company to start the year with conservative guidance of 6-8% given the recent events in global banking industry (BFSI accounts to 32% of Infosys’ annual revenue) and overall caution in new deal signings. It has cut Infy’s FY24 dollar revenue estimate by 1.2% and assume 7.4% YoY CC growth in FY24 on slower tech spending in the BFSI vertical and its follow-on effect on other verticals. Infy’s exposure to regional banks is not material, but the ongoing uncertainty in the U.S. and European banking industry may lead to moderation in BFSI revenue growth in the near term.

ICICI Securities in its report said margin headwinds in Q4FY23 will be visa costs and lower working days, whereas improving subcon costs, utilisation will be key tailwinds. On attrition, the agency said that it is closer to desired levels and supply-side pressures are easing off. Infosys has witnessed the exit of two key presidents - Mohit Joshi and Ravi Kumar - in the last six months.

Wipro’s revenue to decline by 0.5% QoQ

The IT services major is expected to report a 0.5% decline in revenue on quarter-on-quarter (QoQ) on a constant currency basis during the quarter under review. This will translate to 11.5% YoY CC growth in FY23E, near the lower end of the guided range of 11.5-12% in FY23, given the weakness in consulting business and worsening macro environment.

The agency estimates around 100bps cross-currency revenue tailwind for Wipro. The EBIT margin is seen to be largely flattish (nearly 20- 30bps), QoQ expansion in Q4FY23. It expects Wipro to guide -1% to +1% QoQ CC revenue growth for Q1FY24.

The brokerage has cut Wipro’s FY24 dollar revenue estimate by 1.2% and assume 3.5% YoY CC growth in FY24 due to slower tech spending in the BFSI vertical and its follow-on effect on other verticals. “We see right shifting of demand to FY25 with no change in US$ revenue assumption for FY25 and FY26 and thus, higher revenue growth assumption of 8.9%/8.6% YoY CC in FY25E/FY26E. We cut EBIT margin estimates by ~60bps/50bps for FY24/25 due to lower revenue growth. As a result, our EPS estimates are cut by 4.5%/4%/1% for FY24/25/26, respectively,” it added.

ICICI Securities in its report said that Wipro is seeing increasing focus on large cost take out, vendor consolidation and infrastructure deals, whereas discretionary spends are slowing down. Additionally, it is seeing delivery team led sales slowing down.

“In some instances, clients have paused /delayed/downsized projects. However, clients have not completely stopped their transformation journeys and bookings are expected to remain healthy. It is seeing weakness in the consulting business,” it said.

On exposure to Credit Suisse, the brokerage said that the Switzerland-based investment bank is not among Wipro’s top 10 clients. “Wipro is seeing caution among clients in the BFSI vertical due to the recent events in the US and European banking industry. It has a good presence in UBS and expects to win market share following the merger of UBS and Credit Suisse). It has some exposure to Credit Suisse but it is not among Wipro’s top 10 clients. Also, it has negligible exposure to regional banks in the U.S. In Q4FY23, the company expects Europe to grow faster than the U.S.,” the report noted.