As results season for the September 2024 quarter (Q2FY25) is slated to kick off next week, Indian IT companies are likely remain in the spotlight of market participants. Indian IT bluechips companies like Infosys and Tata Consultancy Services (TCS) are traditionally known to officially kick of the result season on Dalal Street.
With rate cut cycle kicking off lately, brokerage firms expect a turnaround in the IT industry in CY25, with some expecting the July-September period as another quarter on the path to recovery. However, some analysts see the quarter to be a difficult one related to demand and softening of the US dollar.
According to the analysts tracking the IT sector, deal wins and margins along with the management commentary shall be the key for the IT counters. Some experts are expecting tailwinds from the improving business sentiments, rising demand for generative AI and strong momentum in outsourcing.
Q2FY25 is likely to be a stable quarter, with a gradual improvement in growth and commentary from companies. Revenue growth is likely to be in the positive territory for almost all companies – alluding to an overall improving environment. Quality tier-2 companies shall continue to outstrip their larger peers. Deal flow shall continue to be stable, said Nuvama Institutional Equities
"We reckon companies shall report green shoots in specific pockets in Q2 – with the overall business environment staying the same. This quarter’s commentary comes on the heels of the first interest rate cut by the US Fed. We expect discretionary spends to recover hereafter and sector growth to revive, as deal to revenue conversion improves," it said.
The read across Indian IT companies remains positive, as the growth trend and strong bookings within outsourcing are encouraging and should replicate though FY25, said Prabhudas Lilladher in its recent report post Accenture earnings.
On the other hand, JM Financial believes that IT Services demand has likely not turned yet, at least not for good. Pockets of strength in US BFSI, though sustained, have not expanded to adjacent areas. Clients’ focus has not shifted from efficiency/cost take-out deals. Ramp-downs, especially in the UK/EU, haven’t ceased completely, it said.
"Softness in dollar against major currencies means cross-currency has turned favourable. We expect 10-80 bps cross-currency benefit, driving better USD print. Margins should be range-bound and deal flow steady. Year beginning expectations of normal seasonality are unlikely to have changed," it said.
Deal wins will be a key enabler of differentiated growth for Indian IT similar to the current fiscal, said Kotak Institutional Equities. "We believe there are not enough large deals in the market to satisfy all players. The current scenario of some winners and some losers will continue with ample indication provided by new deal wins," he said.
"We also believe that post Q4FY24 results, FY25 estimates have been adequately cut, leaving little room for further downgrades. We continue to remain positive on the sector in the near term on improving macro and long term (on the Gen AI opportunity," added Nuvama with a positive view on LTIMindtree, Infosys, Persistent, Mphasis, Coforge, TCS and HCL Tech.
"Fed rate cut has raised hopes of demand revival. Investors should therefore pick stocks where earning visibility/valuation comfort is higher" suggested JM Financial. It has picked Infosys, Tech Mahindra and Wipro from the largecap space, while KPIT Technologies and Persistent Systems are its preferred picks from midcap basket.