News & Analysis

Q3 Growth of IT Companies: An Upbeat Mood

While Infosys and HCL beat market expectations on revenues and profits, experts believe that it does not rule out road-bumps ahead

Third quarter results from the Indian IT industry have beat market expectations, both on the revenue and profit fronts. The top three companies – TCS, Infosys and HCL – also reported a sustained deal momentum in spite of seasonal weaknesses as well as fears of recessionary headwinds in their target geographies of North America and Europe. 

Market experts believe that this collective performance proves the resilience of the IT services industry in India, especially given that it managed to beat the rising uncertainty over the demand outlook from both the United States and Europe. However, it could still be too early to blow the bugle, given that long-term prospects could still depend on the global economic headwinds. 

Leading up to the third quarter of fiscal year 2023, the IT services industry spoke repeatedly about possible vendor consolidations in the markets affected by high interest rates and reduced liquidity as central banks curtailed money supply. It was expected that some of these companies would put the lid on hiring till such time that the clouds of uncertainty cleared up. 

However, in spite of these challenges, the top three IT company results have come as a welcome surprise as none of them reported any vendor consolidation or pressure on hiring. In fact, market experts believe that this reducing pressure on hiring could support profitability in the medium term as employee costs would soften. 

Now coming to specifics, TCS reported an order book worth $7.8 billion for the quarter compared with $8.1 billion in the previous one and $7.6 billion exactly twelve months back. This shows that things haven’t actually slit down the chute and on an annual basis it has in fact shown some little improvement despite the macroeconomic headwinds. 

Coming to Infosys, the company bagged deals worth $3.3 billion during the third quarter, its highest over the past eight quarters. This number compares favorably with an order book of $2.7 billion over the July-September quarter as well as those from a year ago when the company booked orders worth $2.5 billion. 

Coming to HCL, the company shared its financial results wherein it showcased an order book of $2.4 billion during the December quarter, which was higher compared to the $2.1 billion order book that it had reported in the third quarter of the last financial year. However, HCL reported the largest margin expansion assisted by increased traction in the products and platforms. 

The company’s operating margins rose by 165 basis points sequentially to 19.6% in the third quarter of fiscal year 2023 while revenues grew by 5.3% to $3.2 billion. In the case of Infosys, the margins were flat at 21.5% with revenues growing 2.3% to $4.6 billion. TCS reported a 2.9% spike in revenues at $7.07 billion with margins of 24.5%. 

Another important factor that came out of the quarterly result is the reversal of attrition trends as well as subsequent hiring numbers. The trailing 12-month attrition for Infosys fell by 280 basis point sequentially to stand at 24.3% while HCL reported a 210 basis point drop at 21.7% while in the case of TCS it reduced 20 basis points to 21.3% over the third quarter. 

That the worst is yet to come is perhaps evidenced by the tapering year-on-year incremental TTM revenues over the past five quarters. After hitting a peak in the January-March quarter, it has gradually moderated over subsequent quarters. The true test of the business could become visible when these companies share their quarterly results for January-March. 

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