The IT services sector, which confronted challenges such as macroeconomic headwinds, recession concerns, and reduced client spending, is anticipated to continue facing these issues in the coming quarters.
Analysts foresee modest growth in the sector for the September quarter, with expectations of subdued growth.
Tata Consultancy Services (TCS) is set to be the first to announce its Q2FY24 earnings on October 11, followed by HCLTech and Infosys on October 12. Wipro and LTI Mindtree will follow with their results on October 18. Kotak Institutional Equities, in its IT Services: 2QFY24E preview, predicts muted revenue growth for tier-1 IT firms in a seasonally strong quarter.
“EBIT margin will fall marginally year-on-year (YoY), with the quarterly movement influenced by the wage revision cycle. We expect muted revenue growth for mid-tier,” the report states.
While some cases anticipate record deals that could shape FY2025, TCS, Infosys, and HCLTech have secured significant deals in the second quarter. Analysts project Infosys to have a Total Contract Value (TCV) of $5.5-6 billion and TCS at $12 billion, reflecting a 48% YoY increase.
“We believe deal flow has steadied after the transition from discretionary spending-powered short-tenured programs to larger programs fueled by cost take-outs, which have longer sales cycles. We expect the continuation of cost take-out deals in CY2024 along with an improvement in discretionary spending,” notes Kotak Institutional Equities.
JM Financials also expects large-cap IT services players to report modest (1%) to +1% CC quarter-on-quarter (QoQ) growth in Q2. It anticipates Infosys and TCS to be at the upper end of this range, while Tech Mahindra, still affected by project ramp-downs in the first quarter, may be at the lower end.
HDFC Securities predicts a soft quarter for the IT sector, although historically, Q2 has been a seasonally robust period. The research foresees growth disparities among companies, with tier-1 IT firms expecting a sequential growth range from -1.4% to +2.2%, while mid-tier IT firms may range from +0.9% to 3.8%.
Despite soft quarters reported by some players, AI spending and adoption are expected to accelerate, complementing growth. Cloud migration and application modernization will remain key medium-term investment areas. Increased competition in deals and senior-level leadership changes are also notable industry trends.
Analysts expect IT hiring to remain subdued in the ongoing quarter, continuing a trend seen over the past year, with headcounts declining at top IT companies. However, there is optimism for IT hiring in Q3, particularly for roles related to green technology, electric vehicles, AI, and cybersecurity.
IT Q2 Results Preview: Expectations and Trends
Margins are expected to have more tailwinds in FY25, including falling attrition rates, improved utilization rates, and operating leverage.
Top IT companies have seen minimal hiring in the past year.
Deal bookings in the IT sector have been strong, with many firms securing significant deals in Q2, mainly focused on cost optimization and consolidation.
Kotak Institutional Equities expects a sequential growth rate of 0.5-0.8% C/C for Infosys, HCLTech, and TCS, while a decline of 0.6% is anticipated for Wipro, and Tech Mahindra is expected to maintain flat revenues.
