Last quarter, HCLTech had given a guidance of 3-5 percent revenue growth YoY (CC) as compared to 5-5.5 percent revenue growth guidance in FY24.
Infosys slashed its revenue growth guidance in the upper end for FY25 to 1-3 percent, from 1.5-2 percent in the previous year.
Discretionary spending to improveCommentary on whether discretionary spending has started to stabilise will be closely watched.
Analysts highlighted that while clients remain cautious of tech spending, the worst may have been over for discretionary spending delays.
All said and done, brokerage Nomura believes Q1FY25 will mark the bottom of sluggish revenue growth for the Indian IT services sector.
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The Indian information technology (IT) sector is set to announce its June quarter earnings for the financial year 2025 (Q1FY25) from July 11 onwards, kickstarting with the country’s largest software exporter Tata Consultancy Services (TCS).
Analysts unanimously believe that Q1 would be sequentially better than the last quarter, driven by seasonal improvements and ramp-up of large cost takeout deals won in previous quarters.
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The previous fiscal year was among the worst-hit years in terms of performance for the sector since the financial crisis of 2007-2008.
Here are the five themes to watch out for in the management commentaries.
Revenue growth
Analysts at Kotak Institutional Equities (KIE) expect decent growth sequentially, led by Infosys and LTIMindtree among Tier-1 firms, given the lower base from previous quarters.
Meanwhile, ICICI Securities highlighted Persistent Systems as a clear winner, with Infosys and TCS trailing them.
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“We expect no major fireworks in Q1FY25, but some green shoots in terms of growth…We expect PSYS (Persistent Systems) to not only lead the pack but also be head and shoulders above the rest with five percent organic growth. INFY (Infosys)/TCS shall follow at a distance with robust sequential growth of two percent/1.8 percent,” the ICICI Securities report said.
Revenue growth is coming from the pockets of green shoots appearing in artificial intelligence (AI), consulting, engineering, research, and development (ER&D), healthcare, and BFSI. Clients are focussing on critical projects that have the potential for prompt Return on Investment (RoI). The report also highlighted that AI-related spending is coming at the expense of IT budget thinning in other areas.
Further, analysts at JM Financial don’t expect any changes in the revenue growth guidance of Infosys and HCLTech following the footsteps of global peers like Cognizant.
Last quarter, HCLTech had given a guidance of 3-5 percent revenue growth YoY (CC) as compared to 5-5.5 percent revenue growth guidance in FY24.
Infosys slashed its revenue growth guidance in the upper end for FY25 to 1-3 percent, from 1.5-2 percent in the previous year.
Discretionary spending to improve
Commentary on whether discretionary spending has started to stabilise will be closely watched. Analysts highlighted that while clients remain cautious of tech spending, the worst may have been over for discretionary spending delays.
“While a strong recovery in discretionary demand may take a few quarters, it is unlikely to worsen further,” Nomura’s report said.
Artificial intelligence (AI) has been the only area to see continued customer interest and tech spending coming in. “AI-related activity saw an accelerated pace in Q1 with most companies announcing separate business units and partnerships to get the competitive edge. WPRO (Wipro) clearly stands out in terms of AI-led activities,” said analysts at ICICI Securities.
Also read: TCS vs Wipro: Who'll win the AI platform war?
The analysts added, “With clients continuing to scrutinise discretionary spends and focus on cost optimisation, demand commentary from IT companies may not be materially different vs. Q4.”
Gen AI deal pipeline
Generative AI (Gen AI) has become an important driver for IT firms, at a time when discretionary spend remains elusive. The Gen AI deal pipeline has expanded significantly for companies, reflecting growing client interest in integrating AI into their operations, brokerages said.
TCS, Infosys, and Wipro have all reported robust demand for AI services, brokerages added.
Sectors like BFSI, healthcare, and retail are showing heightened interest in integrating Gen AI services.
Last month, Accenture said its Gen AI bookings were worth over $900 million in the second quarter. This takes the total Gen AI bookings to $2 billion for the fiscal year to date, for the world’s largest IT services company.
Accenture and TCS are the only two big IT companies that have declared revenue from this nascent technology, so far.
The Street would look out for other IT companies to quantify the worth of their Gen AI deals won in Q1.
Also read: Techies with machine learning, Python skills in demand for Gen AI jobs in IT cos
Hiring outlook
Due to a gradual demand recovery and persistent economic uncertainties, IT firms are adopting a cautious approach to hiring, analysts said. Companies are focusing on filling essential roles and critical skill gaps rather than expanding their workforce aggressively at a time when demand is still not back on track, largely.
In the fourth quarter ended March 31, 2024, the top five Indian IT companies reported a reduction of almost 70,000 employees.
Analysts say the emphasis is on lateral hiring to acquire niche skills in areas like AI, cloud computing, and cybersecurity. This trend reflects the need for experienced professionals who can contribute to projects from day one.
“Employee bench has been sufficiently optimised in FY2024, which is evident in higher utilisation levels. Expect hiring to pick up to fuel incremental growth," brokerage Kotak said in the report.
Attrition rates are expected to remain stable as companies are proactively implementing measures to retain key talent and reduce turnover.
Deal wins
According to Motilal Oswal Financial Services, the ramp-up of large cost-takeout deals is expected to drive growth for large-cap IT companies in this traditionally strong quarter. Despite this, the brokerage said the IT industry is bracing for one of the weakest first quarters in a decade, highlighting the continued sluggishness in the flow business.
The focus will be on signs of recovery in discretionary spending and whether the ramp-up in deal activities can offset the ongoing challenges. “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 brokerage said in the pre-earnings report.
Nonetheless, verticals such as BFSI and communications, which have been under pressure for several quarters, may see some growth acceleration due to recent deal wins. However, the hi-tech sector might face renewed challenges as software spending moderates.
“Large and mega-deal announcements have been somewhat below our expectations for most companies, except Wipro, courtesy of the $500 million deal with a US telecom client. Most deals are driven by cost optimisation mandates,” brokerage Kotak said.
Interestingly, total contract value was relatively weak for Infosys and HCLTech in Q1FY24 but hit record highs in Q2FY24. Therefore, the timing of large deal signings tends to be volatile, and hence, signings can bounce back for companies such as Mphasis, Coforge, and TCS in Q1.
All said and done, brokerage Nomura believes Q1FY25 will mark the bottom of sluggish revenue growth for the Indian IT services sector.
Also read: What's driving the Nifty IT Index rally in the past few days?
