Indian Information Technology (IT) companies are projected to report improved earnings growth in the second quarter of FY25 compared to the first quarter. This growth is expected to be driven by an uptick in hyper-scaler momentum, robust performance in North America following a period of stagnation, and positive trends in the healthcare sector. While analysts are optimistic about a shift in client spending behavior, they anticipate a gradual recovery, which may initially be confined to specific segments.
Tata Consultancy Services (TCS), the largest software services exporter in India, is set to announce its Q2 results on October 10, 2024. The IT services provider said its board will also consider a second interim dividend for FY25 on the same day.
Brokerage firm Motilal Oswal Financial Services forecasts a year-on-year (YoY) growth of 5.1% in aggregate revenue, 5.0% in EBIT, and 5.3% in net profit for IT stocks within its coverage universe for the July-September quarter of FY25.
For Tier-I companies, revenue growth is expected to range from flat to +3.0% quarter-on-quarter (QoQ) in Constant Currency (CC) terms. Meanwhile, Tier-II companies are projected to experience revenue growth between flat to +4.5% QoQ CC.
“Mid-tier companies should continue to do well though, especially companies with strong offerings in data engineering and ERP modernization and we expect their growth outperformance to be sustained over the medium term,” said the brokerage firm.
It anticipates 30-60 basis points (bps) of cross-currency tailwinds for IT companies on a sequential basis. Sector margins for Q2FY25 are expected to remain largely range-bound, as wage hikes have been deferred to the second half of FY25.
Client spending behavior is showing positive trends, indicating a potential return of modernization and discretionary spending, albeit in some pockets.
MOFSL expects Infosys and TCS to report relatively strong QoQ growth of 3.0% and 1.0% in CC terms, respectively, while HCL Technologies is anticipated to show flat growth in Q2FY25. Tech Mahindra and Wipro are also projected to remain flat QoQ, whereas LTIMindtree could post a healthy growth of 3.0%.
Among mid-tier companies, MOFSL expects Persistent Systems to lead with 4.5% QoQ revenue growth, driven by sustained momentum in the healthcare sector. Coforge is likely to experience a strong quarter with 4.0% QoQ growth, while Mphasis is expected to post 2.0% QoQ growth.
EBIT margins for TCS are estimated to decline slightly by 20 bps QoQ, mainly due to the ramp-up of the BSNL deal and investments in talent development and training. HCL Technologies might see a slight improvement in margins, although wage hikes in the second half of FY25 could create headwinds.
For Infosys, margins are expected to decline by 80 bps in Q2, as the reversal of one-off benefits and investments in large deals will impact profitability. Tech Mahindra's margins are forecasted to improve by 50 bps, while Wipro is expected to experience a minor decline.
Among mid-cap IT companies, MOFSL expects a mixed performance. Coforge margin is expected to fall ~100 bps, primarily due to wage hike impact, whereas large deal ramp-ups and wage hikes will pressure margins, though optimization measures will help to offset this pressure for Persistent Systems.
Mphasis' margins are expected to remain range-bound, while L&T Technology Services is projected to achieve a 90 bps QoQ gain, driven by offshoring and a favorable workforce pyramid structure, according to MOFSL.
Among Tier-I IT stocks, MOFSL prefers HCL Technologies and LTI Mindtree for their strong capabilities in data engineering, ER&D offerings (HCLT) and ERP modernization, making them well-suited for pre-GenAI spending.
Their portfolio mix of discretionary and nondiscretionary businesses should also support growth in the current business environment, MOFSL said.
For Tier-II players, Motilal Oswal’s top picks are Persistent Systems and Coforge, both poised for strong performance.
Persistent Systems benefits from its focus on high-growth sectors like BFS and healthcare. For Coforge, despite uncertainties surrounding the Cigniti integration, we believe it can achieve cost synergies sooner than anticipated, presenting upside risk to our estimates, MOFSL said.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
