The Indian information technology (IT) industry will kick off the earnings season starting today at Tata Consultancy Services (TCS), with its first quarter results for FY25 set to set the tone for this fiscal year. The Indian IT industry has posted a below par performance for FY24 in view of the challenging macro environment of subdued demand and is now expected to post revenue growth of up to 2% in the first quarter.
"Q1 FY25 is expected to be a decent quarter for the IT services sector. Selected Tier I and Tier II companies should witness an acceleration in growth through deal ramp-ups. We expect QoQ CC revenue growth of - 2.0% to + 2.5% for Tier I companies and - 1.0% to + 4.7% QoQ CC for Tier II companies Brokerage house Philips Capital said in its note
On our large-cap coverage, we expect 1QFY25 revenue to grow 0.4 per cent to 2.2 per cent q-q CC, but HCLT will report a decline. In our coverage, we see mid-caps reporting 1.6-5.5 per cent q-q CC revenue growth. " BNP Paribas commented:
This will come as a welcome relief for the Indian IT industry after registering a flat revenue growth in the comparable previous quarter - Q4 FY24. Within three months, there was some change in the macro environment as there were less visible signs of demand coming back.
"Q1FY25E will be slightly better than previous quarters. The sector may witness some early signs of growth. "Deven Choksey Research said in its note.
These early signs of growth are likely to be driven by the cut in discretionary spending and emerging opportunities in AI, consulting, engineering research and development (ER & D) healthcare, banking, financial services and insurance (BFSI), it added.
The BFSI segment is the largest revenue generator for the Indian IT industry and its spending on technology has been subdued. This segment is expected to start investing in digital services and AI.
"The main trigger for growth is rising discretionary spending on technology. As Philips Capital noted, we believe that discretionary spending will not worsen, and as the timing for interest rate cuts becomes clearer, the outlook for discretionary spending will improve. Gen AI adoption is likely to improve the demand for cloud and data services. "
However, this mildly positive outlook on revenue growth may not translate into improved operating profitability for some companies, given the wage hikes and other investment costs for Indian IT companies.
"We expect EBIT margins to expand q-q for most of our coverage companies, except TCS, HCLT and PSYS," "BNP Paribas said in its note."
The key factors to watch out for during the first quarter result announcement will be the demand environment of the companies, deal flow, recruitment plans and investment into new technologies.
Announcements of big, mega deals usually fall short of our expectations for most companies. However, it is expected to bounce back in Q2FY25E or H2FY25E, "said Deven Choksey Research
Indian IT companies are expected to provide moderate revenue guidance and revise it upwards in case of any positive change in the external environment.
