IT services companies are expected to have shown reasonable growth in the June-September quarter, although it remains significantly below the sector’s normal growth rates, according to market analysts.
A recovery in the financial services sector and the ramp-up of cost-takeout deals won in earlier quarters are expected to drive moderate growth. And, in the coming quarters, the reduction in the interest rates by global central banks is seen to contribute positively, they said.
Further, Accenture’s recent earnings report, released last week, has significantly boosted market sentiment. “Accenture’s final quarter earnings has lifted expectations as it has shown that there is a revival in discretionary spending, particularly in the financial services sector which is also a major revenue generating segment for the Indian IT companies,” said an analyst at a domestic broking firm.
However, challenges in other verticals, baring banking, financial services, and insurance (BFSI), will limit the extent of this improvement in the September quarter, analysts said.
“We expect IT companies to report steady growth rates led by recovery in the financial services vertical in the September 2024 quarter,” analysts at Kotak Institutional Equities wrote on Monday.
Company-specific performances
Among the top five IT services players, Infosys is seen to lead the pack with a sequential growth of 3.2%, according to Kotak.
In contrast, larger firms such as TCS, Wipro, Tech Mahindra, and HCLTech are anticipated to post more muted performances. “We expect muted growth at TCS, HCLTech, Tech Mahindra, and Wipro at 1.1%, 0.8%, 0.4%, and 0.1%, respectively,” Kotak noted.
Meanwhile, several other IT firms, including LTIMindtree, Coforge, and Persistent Systems, are expected to see a quarter-on-quarter increase of 2.6%, 3.7%, and 4%, respectively.
Margins to see a moderate uptick
Despite the muted growth, margins for large IT companies are expected to see improvements, thanks to the depreciation of the Indian rupee against the US dollar and British pound as well as continued cost optimisation efforts.
Kotak Institutional Equities forecasts an “increase of 20-50 basis points (bps) in margins for large companies on a quarter-on-quarter basis.”
While large firms such as Infosys and TCS are expected to show improved profitability, mid-tier firms may experience more mixed results due to the increasing contribution of cost-takeout deals, which tend to dilute margins.
For example, Infosys is likely to maintain its earnings before interest and tax (EBIT) margin guidance of 20-22%, driven by tailwinds such as higher utilisation rates and productivity gains. However, headwinds such as the absence of one-off benefits seen in previous quarters could limit the extent of margin improvements.
Deal wins in Q2
Deal wins in the quarter that ended September are expected to continue their focus on cost takeouts, with fewer mega-deal announcements.
Infosys, for example, is anticipated to secure deals with a total contract value (TCV) of over $3 billion, though this represents a decline from previous quarters, Kotak said.
In contrast, companies such as Mphasis, Coforge, and TCS are expected to report muted or declining TCV on a year-on-year basis. For TCS, while its deal pipeline remains robust, challenges in Europe have affected its broader performance.
Sectoral performance: BFSI leads, retail weakens
The BFSI sector is expected to drive much of the growth for IT companies in Q2 of FY25, while sectors like retail are experiencing demand softening.
“We expect financial services to remain the dominant contributor to growth, particularly in the US market,” said an analyst.
On the other hand, retail, which had been a key growth driver in the past, is seeing a decline in demand. Additionally, energy and utilities, as well as manufacturing sectors, are facing sluggish growth, particularly impacting companies like Wipro.
Meanwhile, generative AI (GenAI) continues to be a key focus for IT services companies, with many securing projects related to this emerging technology. However, the extent of these projects is still limited in terms of revenue contribution, Kotak said.
Nonetheless, IT firms are ramping up their investments in this area, expecting more meaningful contributions in future quarters as client adoption increases.
Guidance and outlook for FY25
Looking ahead, Infosys is likely to raise its revenue growth guidance for FY25 to 4-5%, up from its earlier projection of 3-4%.
“We expect Infosys to raise FY2025E revenue growth guidance to 4-5%, supported by a robust deal pipeline and recovery in financial services,” according to Kotak.
In contrast, Wipro is expected to issue a more conservative guidance of -0.5% to +1.5% growth for the December quarter, reflecting challenges in some key verticals.
Investors will be closely watching company commentaries for further insights into discretionary spending trends, the state of the pipeline in the BFSI sector, and margin levers that could help offset wage hikes and other cost pressures.
