Indian IT companies are set to announce their third-quarter earnings for FY25 in January. While H2 is typically ridden with the usual seasonal factors like furloughs, analysts forecast that an improvement in the growth momentum on a YoY basis is likely to continue in Q3.
After a decent Q2, seasonal furloughs will weigh on growth for the IT sector in Q3FY25. However, beyond this seasonality, macro uncertainty is gradually easing, as pointed out in a Motilal Oswal Financial Services (MOFSL) report, with the outlook for technology spending expected to improve in CY25.
“While the initial phase of recovery in H1FY25 was sluggish, we now see clear signs of an acceleration. Recovery appears to be expanding beyond US BFSI—which continues to strengthen—into additional industry verticals like Hi-Tech, which is recovering ahead of schedule,” it observed.
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An Emkay Global Financial Services report also attributed this continued improvement in growth momentum to the recovery in BFSI, lower project cancellations, the beginning of the interest rate cut cycle, and the gradual end of uncertainties around the US elections. On the other hand, weakness in Manufacturing, particularly Auto, is likely to weigh on growth.
“EBITM performance remains mixed, on a sequential basis, depending on salary hike cycle, large deals ramp up and other factors. In Q3, deal wins should remain similar to Q2. However, the absence of mega deals and continued weak discretionary spending should continue to weigh on overall deal intake in Q3 as well. The overall construct of deal wins should remain similar, with cost takeout and vendor consolidation deals remaining the mainstay,” the report said.
The deal pipeline remains healthy across most companies, with a varying pace of decision-making across sectors and clients. The demand environment has been largely unchanged since the last quarter. According to the report, with the interest rate cut cycle already underway and the US Presidential elections behind, clarity should emerge in the next couple of months, regarding tech budgets.
Vertical-wise, some green shoots were observed in BFSI, particularly in North America, which might be sustained in Q3. The auto vertical saw pressure in Q2 which is expected to continue in Q3 as well. There is no anticipation for improvement in discretionary spending in Q3.
After Q3FY25, client budgets for CY25 being finalised would act as a catalyst for the sector, with the magnitude of change in client behaviour becoming clearer, suggested the MOFSL report.
TCS, Infosys, and HCLTech are likely to see QoQ constant currency revenue growth of around 0.4 per cent, 1.0 per cent, and 3.7 per cent respectively.
Mid-tier companies will outpace this growth, with Coforge and Persistent Systems expected to see respective growth of 4.9 per cent and 4.0 per cent.
Tier-I companies may witness revenue growth of -1.0 to +3.7 per cent QoQ CC. Tier-II players, on the other hand, will grow 0-5 per cent QoQ in CC terms.
However, furloughs and wage hikes will put pressure on margins in Q3. Companies like Infosys and LTIMindtree may see margin declines due to a seasonally weak H2 and furloughs, and wage hikes.
According to Emkay Global Financial Services, Infosys will narrow its guidance to 4-4.5 per cent from 3.75-4.5 per cent, and HCLTech will increase its guidance to 4.5-5.5 per cent from 3.5-5 per cent, factoring in the CTG acquisition. Wipro may guide -0.5 to +1.5 per cent growth for Q4FY25.
In December, Accenture reported financial results for the first quarter of fiscal 2025. It updated its business outlook for fiscal 2025 by raising the full-year revenue growth to 4-7 per cent in local currency, driven by a strong order inflow in FY24 due to its active pivot towards efficiency deals.
However, according to a BOB Capital Markets report, it is difficult to make a comparative analysis of this vis-à-vis large Indian players since the annual contract values (ACVs) are not revealed and the total contract value (TCV) numbers are not comparable.
