Indian IT firms anticipate modest Q1 rebound amid challenges
MUMBAI, INDIA — Indian IT companies are poised for a modest rebound in their Q1 earnings for FY25, driven by large deal ramp-ups and a reduction in discretionary spending cuts.
According to financial services company Motilal Oswal, the industry is set to experience “sequential improvement in a seasonally strong quarter” despite a challenging backdrop marked by significant cuts in discretionary spending in previous quarters.
Revenue growth projections for FY25
Major players like HCL Technologies and Tata Consultancy Services (TCS) are expected to see revenue growth of 5-7% in constant currency terms for FY25. This growth is contingent on the recovery in the flow of business and renewed discretionary spending by clients.
Mid-tier companies, especially those with strong pre-generative artificial intelligence (GenAI) spending in data engineering, are also expected to perform well.
Motilal Oswal forecasts revenue growth of -0.5% to +2.0% quarter-on-quarter in constant currency terms for tier-1 companies and -1.5% to +5.0% for tier-2 players.
Infosys is expected to benefit significantly from recent deal wins, which should accelerate growth despite pressures in verticals such as banking financials and communications.
Margin outlook and deal momentum
Margins are expected to remain largely stable. Analysts caution that the balancing act of deferring wage hikes against visa costs and the recovery of lost volumes will likely result in a slightly negative bias for Q1 FY25.
ICICI Securities predicts an average margin expansion of 19 basis points sequentially for the sector.
Deal activities are also on a subtle rise, with a focus on cost-takeout projects. JM Financial suggests that deal win momentum has been sustained in Q1, although mega deals are sparse.
“Deal win momentum likely sustained in Q1…however, barring Wipro’s $500 million deal win from a US-based Telco, mega deals have been missing,” the brokerage firm said in a report.
Impact of GenAI on IT sector
GenAI adoption is gaining momentum and is set to improve demand for cloud services and data standardization. This technological advancement is expected to be a significant aid for the sector moving forward, especially in enhancing service delivery and operational efficiencies.
Nomura noted in a report that “GenAI adoption is likely to gain steam in the next 12-18 months and could improve demand for cloud services and data standardization.”
Company-specific performance forecasts
Infosys and TCS are set to lead the pack among large-cap companies. Motilal Oswal predicts strong quarter-on-quarter growth for Infosys, expecting a 2.0% increase in constant currency terms, while TCS is forecasted to see a 1.6% growth.
In contrast, HCLTech is expected to face challenges, with a projected 2% revenue growth decline, largely due to productivity gain sharing in a significant deal.
Mid-tier IT companies like Persistent Systems and Coforge are expected to show strong performances driven by niche capabilities and strategic deal ramp-ups. Persistent is anticipated to lead with a 5% quarter-on-quarter revenue growth, particularly strong in the healthcare vertical.
Coforge, while expected to have a slower quarter at around 1.5% growth, remains a strong player due to its diversified portfolio.
