Synopsis: Brokerage firms anticipate a recovery in the Indian IT industry by CY25, supported by a recent rate cut cycle. With the Q2FY25 earnings season set to begin, top IT companies like Infosys and TCS are expected to kickstart the results. Analysts predict steady deal wins and positive revenue growth, driven by demand for generative AI and outsourcing momentum.
As the rate cut cycle takes off, brokerage firms are increasingly optimistic about the recovery of the Indian IT industry, projecting a turnaround by the calendar year 2025 (CY25).
Some experts are even expecting the July-September 2024 period (Q2FY25) to show further signs of recovery, marking it as another quarter on the road to resurgence.
The earnings season for the September 2024 quarter is set to kick off next week, with Indian IT giants Infosys and Tata Consultancy Services (TCS) traditionally leading the way on Dalal Street.
Given their market prominence, all eyes will be on these blue-chip companies as they set the tone for the rest of the IT sector.
Despite the optimism, some analysts are cautious, predicting that Q2FY25 might face challenges due to demand softness and the weakening of the US dollar.
According to industry experts, key factors to watch will include deal wins, profit margins, and management commentary, which will play crucial roles in determining the sector’s performance.
Brokerage firms, such as Nuvama Institutional Equities, have expressed confidence in a stable quarter for the IT sector, with gradual improvements in growth.
They also anticipate revenue growth for almost all companies, reflecting an improving overall environment.
Tier-2 companies, in particular, are expected to continue outpacing their larger counterparts, with stable deal flow providing further support.
Nuvama Institutional Equities stated that they expect to see "green shoots" in certain segments during Q2FY25, with the business environment staying relatively stable.
They believe that discretionary spending will recover, leading to improved sector growth as deal-to-revenue conversion increases.
This sentiment was echoed in a report by Prabhudas Lilladher, which highlighted strong outsourcing demand and deal bookings following Accenture's earnings, predicting similar trends for Indian IT firms through FY25.
However, JM Financial takes a more conservative view, indicating that demand for IT services has not fully recovered.
The focus on cost-efficiency deals continues, with no substantial expansion into adjacent sectors, particularly in the UK and EU, where ramp-downs persist.
Despite these mixed sentiments, analysts foresee certain tailwinds.
Cross-currency benefits due to the softness of the US dollar are expected to drive improved earnings, with Kotak Institutional Equities noting that deal wins will remain a critical factor in differentiated growth for Indian IT companies.
They also believe that the sector has already seen significant downgrades in FY25 estimates, reducing the likelihood of further cuts.
Nuvama remains positive about the long-term outlook, citing opportunities in generative AI and continued improvement in macroeconomic conditions.
The firm has a positive outlook on key players like LTIMindtree, Infosys, Persistent Systems, Mphasis, Coforge, TCS, and HCL Tech.
Similarly, JM Financial suggests that investors focus on companies with strong earning visibility and valuation comfort, recommending Infosys, Tech Mahindra, Wipro, KPIT Technologies, and Persistent Systems as top picks.
In conclusion, the Q2FY25 earnings season promises to be pivotal for the Indian IT sector, with market participants keeping a close eye on revenue growth, deal wins, and management commentary.
While some analysts remain optimistic about gradual recovery and long-term growth, others remain cautious due to lingering demand challenges and sector-specific risks.
As the Fed rate cut fuels hopes of a demand revival, investors are advised to select stocks with strong earnings visibility and favorable valuations, particularly in light of the sector's exposure to global macroeconomic trends and emerging technologies like generative AI.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions. The views expressed are based on current market trends and may be subject to change.
