In fact, there are worrying similarities between the two.
First and foremost, HCL’s Ebit margin at 17% declined 100 basis points (bps) sequentially, and was at a multi-quarter low. Also, it was below consensus estimate of 17.6%. Ebit is short for earnings before interest and tax. One basis point is 0.01%.
TCS also missed consensus margin estimates. At 23.1% TCS’ Ebit margin hit a multi-year low.
Second, attrition rose further. HCL’s last twelve months IT Services attrition increased to 23.8%, up 190 bps quarter-on-quarter. The company’s management expects attrition to start tapering from Q3 onward.
For TCS, attrition on LTM basis rose to 19.7% from 17.4% in Q4FY22.
Higher sub-contracting costs, increased attrition and travel costs making a comeback were factors that hurt Ebit margins of HCL and TCS. The HCL management expects margins to improve from current levels. For FY23, HCL expects margins to be at the lower end of its guided band of 18-20%.
Also, both HCL and TCS have hired lower number of employees in the June quarter compared to the recent quarters.
HCL saw net addition of 2,089 employees during the quarter. Analysts at Prabhudas Lilladher note that this is much lower than the average addition of around 9.6K employees per quarter in FY22.
TCS hired a net 14,136 employees in Q1FY23. This compares with the previous six quarters’ average of around 23,000, said analysts at Nirmal Bang Institutional Equities.
Akin to TCS, the HCL management is also upbeat on near-term demand and is not seeing any slowdown in demand. HCL has retained its FY23 guidance of 12-14% constant currency revenue growth.
Even so, the HCL stock slid to a new 52-week low of ₹905 on the NSE, reacting to its earnings. This is not surprising given that fears of recession-led revenue hit are already lurking on the minds on IT investors. The sector has already seen earnings downgrades for FY23. These may get steeper if margins don’t see the expected recovery or client spending reduces in quarters ahead.
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