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IT companies may see modest recovery in Q1 profits – Industry News
IT companies are poised for a modest recovery during the April-June quarter, based on an acceleration in large deals and moderation in discretionary spending cuts. The period is also seen as a seasonally stronger quarter.
According to Motilal Oswal, the industry is set to experience “sequential improvement in a seasonally strong quarter” despite a challenging backdrop marked by significant cuts in discretionary spending in previous quarters. This period could signal the end of what has been described as the “brutal winter of discretionary spending cuts,” the brokerage said in its preview report.
Industry growth projections
According to Motilal Oswal, while sectors such as banking finance and communications have faced pressures, recent business wins are expected to accelerate growth, mainly benefiting companies such as Infosys. The company expects revenue growth of -0.5% to +2.0% in the quarter in constant currency for Tier 1 companies and -1.5% to +5.0% for Tier 2 companies.
On similar lines, Kotak Institutional Equities expects moderate improvements in many companies due to seasonal strength and large deal ramp-ups. “We anticipate a moderate improvement in the growth rate… led by seasonal strength, large deal ramp-ups and reduction in the intensity of cuts in discretionary programs,” they said in a report.
Business Margin and Earnings Outlook
Margins are expected to remain broadly stable. The balancing act of deferring wage increases against visa costs and recovering lost volumes is likely to result in a slightly negative bias for Q1 FY25, analysts warned. ICICI Bonds forecasts an average margin expansion of 19 basis points sequentially for the sector.
Trading activities are also on a subtle rise, with a focus on cost-cutting projects. JM Financial suggests deal win momentum was sustained in Q1, though mega deals were scarce. “Deal win momentum was likely sustained in Q1… however, barring Wipro’s $500 million win from a US-based Telco, mega deals have been lacking,” the brokerage said in a report.
Impact of Generative AI
Nomura points out that GenAI adoption is gaining momentum and is poised to improve demand for cloud services and data standardization. This technological advancement is expected to be a significant help for the industry moving forward, especially in improving service delivery and operational efficiencies.
“GenAI adoption is likely to gain momentum over the next 12 to 18 months and could improve demand for cloud services and data standardization,” the brokerage said in a report.
GenAI’s role extends beyond mere technology adoption; it influences strategic decision-making across the IT industry. Enterprises are increasingly integrating AI into their service offerings, focusing on both cost efficiency and innovative solutions. This shift is expected to create new revenue streams and reshape customer relationships, especially in domains that rely heavily on data insights and automation.
Company-specific performance and future prospects
Infosys and TCS are poised to lead the pack among large-cap companies. Motilal Oswal forecasts robust quarter-on-quarter growth for Infosys, expecting a 2.0% increase in constant currency terms, while TCS is forecast to see 1.6% growth.
In contrast, HCLTech is expected to face challenges, with a projected 2% decline in revenue growth, largely due to sharing of productivity gains in a significant deal. “HCLT’s 2% decline is already built in, as guided last quarter,” ICICI Securities said.
Mid-sized IT companies like Persistent and Coforge are expected to deliver strong performances, driven by niche capabilities and strategic business ramp-ups. Persistent is expected to lead with revenue growth of 5% per quarter, particularly strong in the healthcare sector. Coforge, although expected to have a slower quarter, with growth around 1.5%, remains a strong player due to its diversified portfolio.