IT sector companies will kick off the earnings season for the first quarter of FY25, with Tata Consultancy Services (TCS), Infosys, Wipro, and others leading the way in announcing their Q1FY25 results.
The earnings of the IT services sector for the April-June 2024 quarter is expected to be a mixed bag with sluggish revenue growth and improving operating margins.
Revenues of IT services companies are likely to recover following a tepid Q4FY24, as the ramp-up of large cost-takeout deals could drive growth for large-caps in a seasonally strong quarter, analysts said.
“The brutal winter of discretionary spend cuts in the industry is likely over, but there is little evidence of a recovery in the flow business. Hence, we are on track for one of the weakest first quarters for at least 10 years. The situation, though slightly better, is eerily similar to what we witnessed in 1HFY24. We would be looking for signs of recovery in discretionary spending in the form of deal activities, which have been heavily skewed towards cost-takeout projects,” brokerage firm Motilal Oswal said.
Deal wins in the BFSI and Communications vertices over the past couple of quarters are expected to start accelerating in this quarter, offering some respite to growth rates for these verticals.
The cross-currency impact for the quarter is expected to be minimal. On an average, analysts expect 10-20 cross-currency headwinds on a sequential basis.
According to foreign brokerage firm Nomura, Q1FY25 will mark the bottom of sluggish revenue growth for the Indian IT services sector. It believes interest rate cut cycle (likely in H2CY24) and a potential thaw in decision-making by US corporates post US elections in November 2024 could provide fillip to demand.
Revenue growth of Tier-I IT companies in Q1FY24 is estimated to be in the range of -0.5% to +2.0% QoQ in CC. Revenue of Tier-II IT players is expected to grow by -1.5% to +5.0% QoQ in CC terms, as per estimates by Motilal Oswal.
Nomura expects a mixed operating performance for its coverage universe. Amongst large caps, it expects the strongest revenue growth at +2.5% QoQ (in constant currency or cc terms) for Infosys and the weakest at -2% QoQ in CC from HCL Technologies.
In mid-caps, it expects the strongest revenue growth of +5% QoQ in CC from Persistent Systems and the weakest from L&T Technology Services at -2%.
IT sector margins for the quarter ended June 2024 are likely to remain largely range-bound as the benefits from deferring wage hikes and benign currency movements could be offset by the ongoing challenge of recovering lost volumes.
Motilal Oswal expects TCS’ EBIT margin to contract by about 150 bps QoQ, largely due to wage hikes. For HCL Technologies, it expects margin contraction to be steeper due to seasonality in its software business. For Infosys, it expects margin to improve slightly by 30 bp as gains from its cost-benefit programs are offset by visa and other seasonal costs (with no wage hikes). Tech Mahindra’s margins are expected to remain muted, whereas Wipro should fare better.
Among mid-caps, Motilal Oswal expects most companies to report a sequential margin contraction.
Analysts expect no changes in guidance or commentary from companies on FY25 revenue growth. The focus of the commentaries is likely to remain on demand pick-up in 2HFY25, indicating a more normalized FY26 spending environment.
Here are Q1 results previews of top 5 IT companies:
TCS is estimated to see growth of 1.6% QoQ CC, led by deal scale up, including the BSNL deal, which is ramping up as per plan. The company’s EBIT margin is expected to contract 150 bps QoQ owing to wage hikes in Q1FY25.
The deal pipeline should remain healthy. Outlook on near-term demand & pricing environment, BFSI, and deal wins are key monitorables, Motilal Oswal said.
Infosys’ revenue growth in Q1FY24 is expected to rebound to 2.0% QoQ CC, on account of ramp-up of large deals won in FY24. Motilal Oswal expects the deal TCV to be robust in Q1; however, deals should be skewed towards the cost-takeout initiatives.
Infosys Q1 operating margin is expected to rise by 30 bps owing to growth and absence of wage hikes. The brokerage firm expects Infosys’ operating margin to be at 20.4%. The IT major is also likely to maintain its growth guidance of 1-3% CC for FY25.
HCL Technologies is expected to report a revenue decline of ~2% QoQ in a seasonally weak quarter, largely due to annual productivity pass-backs to clients and a few planned ramp downs in its IT services business. Its margin may contract 80 bps QoQ due to seasonal headwinds. The company is likely to retain its FY25 revenue growth guidance of 3-5%.
IT major Wipro is expected to report ~0.5% decline in the June quarter due to the macro impact and continued softness in verticals. The IT services’ margin is expected to be range bound, and could see a marginal dip, while expect continued softness in key verticals such as retail and communications led by cautious client spending behavior is expected.
LTI Mindtree is estimated to report 0.7% CC growth in the quarter ended June 2024, dragged by weak demand environment and soft discretionary spending. Manufacturing is expected to perform along similar lines, whereas BFSI should see tailwinds from the low-base effect, according to Motilal Oswal. The company’s margin is likely to see a sequential pickup of 90 bps QoQ due to reversion of a one-off impact and better operating leverage.
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