IT firms are poised for a modest rebound during the April-June quarter, on the back of large deal ramp-up and moderation in discretionary spending cuts. The period is also seen as a seasonally stronger quarter.
According to 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. This period could signal the end of what has been described as the “brutal winter of discretionary spend cuts,” the brokerage said in its preview report.
Industry Growth Projections
For FY25, major players like HCLTech and Tata Consultancy Services (TCS) are expected to see revenue growth in the range of 5-7% in constant currency terms, contingent on the recovery in the flow business and renewed discretionary spending by clients. Mid-tier companies, especially those with strong pre-GenAI spending in data engineering, are also expected to perform well.
According to Motilal Oswal, while verticals such as banking financials and communications have faced pressures, recent deal wins should accelerate growth, particularly benefiting companies like Infosys. The firm forecasts a 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.
On similar lines, Kotak Institutional Equities foresees moderate improvements across many companies due to seasonal strength and large deal ramp-ups. “We forecast moderate growth rate improvement…led by seasonal strength, large deal ramp-up and reducing intensity of cuts in discretionary programs,” they said in a report.
Margin Outlook and Deal Wins
Margins are expected to remain largely stable. 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, cautioned analysts. 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 Generative AI
Nomura points out that GenAI adoption is gaining momentum and is set to improve demand for cloud services and data standardisation. This technological advancement is expected to be a significant aid for the sector moving forward, especially in enhancing service delivery and operational efficiencies.
“GenAI adoption is likely to gain steam in the next 12-18 months and could improve demand for cloud services and data standardisation,” the brokerage said in a report.
GenAI’s role extends beyond mere technology adoption; it influences strategic decision-making across the IT sector. Companies are increasingly integrating AI into their service offerings, focusing on both cost efficiency and innovative solutions. This shift is expected to create new revenue streams and reshape client relationships, especially in domains heavily reliant on data insights and automation.
Company-Specific Performances and Future Outlook
Infosys and TCS are set to lead the pack among large-cap companies. Motilal Oswal predicts robust 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 decline of 2% in revenue growth, largely due to productivity gain sharing in a significant deal. “HCLT’s 2% decline is already baked in, as guided last quarter,” ICICI Securities said.
Mid-tier IT companies like Persistent 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% quoarter-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.