IT services companies are projected to see a gradual recovery in the October-December quarter, driven by stronger demand in the banking, financial services, and insurance (BFSI) sector, as well as a reduction in project cancellations, shorter furlough periods, and easing macroeconomic uncertainties.
While growth is expected to remain modest on a sequential basis, the outlook for individual companies and total contract value (TCV) is notably better than the previous year, according to analysts.
The key drivers of recovery include increasing digital investments in financial services, continued adoption of cloud and data services, and the resolution of uncertainties surrounding elections in developed markets. According to Kotak Institutional Equities, “Furloughs during the December quarter are significantly lower than last year, supporting growth momentum”.
Mid-tier firms such as Coforge and Persistent Systems are poised to lead the growth trajectory with sequential revenue increases of 4.7%, while HCLTech is expected to post a solid 4.4% rise. However, industry majors like TCS and Infosys are anticipated to report much slower growth, with rates dipping below 1%. LTIMindtree, despite challenges in the hi-tech vertical, is expected to show stable growth, on the back of its diversified portfolio. Analysts point to the BFSI sector’s robust performance as a bright spot, though they caution that other verticals remain uncertain.
“Momentum in BFSI is strong, but we are less confident about growth in non-financial segments,” noted industry analysts.
The depreciation of the rupee against the dollar during Q3 is expected to provide a slight boost to IT companies, as the majority of their revenue comes from the US. However, analysts warn that the currency volatility could introduce margin fluctuations, complicating financial assessments. Deal activity, however, remains moderate. While TCV figures have slowed, largely due to a decline in mega-deals, there are positive signs in annual contract value (ACV) figures, which reflect steady progress in ongoing projects. Infosys is expected to report large-deal TCVs of around $3 billion, showing a sequential increase, though down year-on-year. Meanwhile, TCS is likely to record $9–10 billion in deal wins, signaling a quieter quarter for big-ticket contracts. “Headcount additions are now a more reliable indicator of demand recovery, given that utilisation levels have already reached their limits,” Kotak added.
Margins are expected to show mixed results across the industry. TCS is likely to post a 40 basis point sequential improvement in its Ebit margins, though it faces a 60 basis point decline year-on-year due to weaker revenue quality and currency headwinds. LTIMindtree, in contrast, may see a sharp 180 basis point sequential drop in its Ebit margins due to the weaker composition of its revenue, coupled with cross-currency pressures and softness in the hi-tech sector. Other companies, such as HCLTech and Coforge, are expected to maintain stable margins, benefiting from strong growth in discretionary spending and robust sectoral demand.
TCS is expected to report flat sequential revenues, mainly due to lower than expected revenues from the BSNL project and seasonality. Infosys is forecasted to achieve 0.7% sequential growth, with its Ebit margins holding steady at 21.2%. HCLTech, which is seeing strong growth momentum, is likely to increase its organic revenue growth guidance to 4.5%–5%, while Wipro is expected to see moderate growth in the range of -0.5% to 1.5%.
Coforge and Persistent Systems, with their strong emphasis on financial services and digital transformation, are forecasted to maintain robust growth rates. Both Infosys and HCLTech are likely to revise their revenue growth guidance upwards, with Infosys expected to raise its forecast to 4.5%–4.75% and HCLTech aiming for 4.5%–5%, reflecting solid sequential performance.
Engineering and R&D companies, particularly those focused on the automotive sector, continue to face headwinds due to a combination of programme cancellations, slower-than-expected adoption of electric vehicles, and increased competition from Chinese manufacturers. This has led to demand slowdowns and deferrals in several key projects.
Looking ahead, analysts predict that the IT sector’s recovery will continue to unfold gradually, with significant improvements expected only after Q3 FY25. While demand for modernisation and cost optimisation remains strong, the full extent of the sector’s rebound will depend on how client budgets for calendar year 2025 evolve.
“The most significant catalyst for the sector’s recovery will emerge post-Q3 FY25, when companies finalise their budgets for the coming year and the full scale of changes in client behaviour becomes clearer,” said Motilal Oswal.