Low demand from North America, margin decline led TCS, Infosys to underperform

and margin assumptions,” Kotak said in a report.

The earnings of two IT majors Tata Consultancy Services (TCS) and Infosys had two common factors. According to analysts from Kotak Institutional Equities, the first factor is deterioration in demand from North America with discretionary programs that were paused or cancelled. The second factor is the companies’ inability to flex margin levers as near-term costs are sticky at the beginning of the slowdown.

“Our structural view on margins and growth has not changed, even as we recognise elevated headwinds that could feed into multiples in the near term. Stocks to avoid are the ones trading at premium multiples after assuming elevated growth

The slowdown was sharper than expected. Infosys and TCS reported QoQ revenue declines of 3.8% and 0.8%, respectively, in North America. The revenue decline in North America was across verticals on a sequential basis. “The reasons for the decline were a pause in discretionary programs and even cancellations. After a slow start in January, projects were paused or cancelled in February and it continued in March. The banking crisis in US regional banks and European banks in March 2023 has induced greater caution and could impact the June 2023 quarter. We would not be surprised by a weak US performance across companies that are likely to report in the coming days,” Kotak said in a post-earnings report.