NEW DELHI, July 13
After two major IT companies Tata Consultancy Services (TCS) and HCL Technologies reported their Q1 earnings the past week, beating street estimates, analysts said that the upwards trend will likely continue for the IT sector. The IT services sector earnings of the first quarter of the financial year is expected to be a mixed bag. Analysts said that revenue of IT services companies are likely to recover this quarter following a tepid Q4FY24. “We believe Q1FY25 will mark the bottom of sluggish revenue growth for the Indian IT services sector. Our proprietary database shows signs of stabilisation in revenue growth outlook for G2000 companies, particularly in the BFSI vertical. While a strong recovery in discretionary demand may take a few quarters, it is unlikely to worsen further, in our view. Overall, we expect revenue growth for large caps to increase from ~3 per cent in FY25F to ~7.7 per cent in FY26F,” said Abhishek Bhandari, CFA, Executive Director, Nomura.
Q1 is seasonally strong for IT companies and so analysts at Anand Rathi expected a higher QoQ growth and also YoY growth, driven by better TCV. Abhishek Shindadkar from InCred Equities said, “We expect tier-I IT services companies to report an average 0.8 per cent QoQ constant currency (CC) revenue growth in Q1FY25F, as ramp-up of deals won earlier outweigh the quantum of discretionary project roll-offs.”
Earlier on Thursday, TCS recorded a 9 per cent on-year growth in profit at Rs 12,040 crore, compared to Rs 11,120 crore reported in the same quarter last year. It posted revenue from operations at Rs 62,613 crore for the April-June period, up 5.4 per cent on-year. TCS’ revenue grew 1.9 per cent QoQ to USD7.51 billion, slightly surpassing expectations and largely backed by higher than estimated revenue contribution from the BSNL deal. EBITM fell by 130 bps QoQ to 24.7 per cent due to wage hike. Deal wins moderated sequentially owing to timing of deal closures, but remained healthy at USD8.3 billion. “Despite broad-based revenue growth, healthy deal wins, and strong pipeline, the management refrained from commenting on growth sustainability, considering the near-term demand volatility caused by weakness in discretionary spending and unabated pressure from the sudden pause/deferment of projects by clients amid macro uncertainty. The management reiterated FY25 revenue growth being better than that in FY24. We largely retain FY24-27E earnings,” said analysts at Emkay Global.
“Looking ahead, there is an expectation of a return to IT growth, which will impact all major IT firms, including TCS. As expected, TCS showed robust momentum with a year-over-year growth in profit percentage,” said Biswajit Maity, Sr Principal Analyst, Gartner
HCL Technologies on Friday recorded its fiscal first quarter profit at Rs 4257 crore, up 20.5 per cent in comparison to Rs 3534 crore during the first quarter of FY24. It posted revenue from operations at Rs 28,057 crore, up 6.7 per cent as against Rs 26,296 crore recorded during the first quarter of previous financial year. The company EBIT stood at Rs 4795 crore. The company also retained its year-on-year revenue guidance for FY25 at 3-5 per cent in constant currency terms and its operating margin around 18-19 per cent. “Management indicated positive growth across all markets and verticals except financial services in Q2FY25. Management believes financial services to grow from Q3FY25, which is in line with our thesis of growth revival in H2FY25,” said Sanjeev Hota, Head of Research, Sharekhan by BNP Paribas.
Biswajit Maity, Sr Principal Analyst, Gartner, said, “We are optimistic regarding HCL Tech’s growth as it has a strong business pipeline. Their global presence, understanding of markets, readiness to adopt new technologies, customer focus, digital transformation capabilities, and robust sales and development teams contribute to HCL Tech’ s consistent growth. They cater to a range of industries, providing lift-and-optimize migration and managed services to large, global clients. HCL Tech remains committed to its vision focused on digital foundations and business engineering, following a “cloud smart” approach. In addition, HCLTech is making increased investments in core digital infrastructure capabilities for delivering industry-aligned outcomes, focusing on sustainability, and driving operational efficiencies.
All these attributes have enabled them to grow and establish themselves as a strong partner.”
According to brokerage firms, IT firms are poised for a modest rebound during the first quarter, on the back of large deal ramp-ups and moderation in discretionary spending cuts. Q1 is seasonally seen as a strong quarter. “Q1 is seasonally strong for IT companies, leading to higher QoQ growth expectations. We also expect higher YoY growth compared to Q4FY24 for most companies, driven by better TCV: revenue conversion as discussions on deal cancellations/ pauses fade away,” said a report by Anand Rathi.
Prabhudas Lilladher report stated, “FY25 is expected to have kick-started with moderate performance in an otherwise strong Q1, attributed to depleting enterprise sentiment and confidence to resume discretionary programs at the onset of adverse macros. Our IT coverage universe (Tier-1) is expected to report a median revenue growth of 0.8 per cent QoQ CC in Q1 vs a median decline of 0.6 per cent CC QoQ in Q4.” It added that a few verticals (BFSI, Communications) witnessed some momentum in activities with a slight uptick in discretionary spends, but it is difficult to call this a trend that is sustainable and predictable.
In terms of deals, analysts at Kotak Institutional Equities said, “Large and mega deal announcements have been somewhat below our expectations for most companies, except Wipro, courtesy the US$500 million deal with a US telecom client. Most deals are driven by cost optimization mandates. We expect a reasonable large deal TCV of US$3 billion+ for Infosys. We expect muted growth or decline in TCV YoY for Mphasis, Coforge.”
Further, Nomura pointed out that GenAI adoption is likely to gain steam in the next 12-18 months and could 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.
Kotak Institutional Equities said that Infosys is expected to post a sequential revenue growth of 2.5 per cent led by 1) a ramp-up of multiple mega deals, 2) the one-off impact of 100 bps on revenues in the March 2024 quarter from rescoping of engagement with a financial services client, and 3) reducing intensity of discretionary project cuts. Infosys is expected to post a large TCV of US$3 billion. “The focus will be on translation of revenues of large deals signed in earlier quarters into revenues. We expect Infosys to retain its revenue growth guidance at 1-3 per cent and EBIT margin guidance band of 20-22 per cent,” it said.
For Wipro, Kotak Institutional Equities flagged a flat revenue for the quarter. “Revenues will be above the midpoint guidance of (-)1.5-0.5 per cent. We attribute relatively strong performance to strength in CAPCO and likely recovery in the Americas market. We forecast a 30 bps increase in EBIT margin QoQ due to cost containment and efficiency measures. We expect strong deal signings after multiple quarters of disappointment. We expect revenue growth guidance of (-)1 to 1 per cent,” it said.
