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IT companies may see green shoots in June quarter

An uptick in large cost take-out deals that have been signed over recent quarters, coupled with no further deterioration of the macro environment, could well see the Indian IT services sector post an improvement in the first three months of 2024-25.

Despite growth on a sequential basis, ongoing cost cuts and a lid on discretionary spending mean the latest June quarter could rank among the weakest first quarters over the past decade. The June quarter is usually considered as a seasonally strong period for the IT sector.

“The brutal winter of discretionary spend cuts in the industry is likely over, but there is little evidence of a recovery in the flow business. Hence, we are on track for one of the weakest first quarters over at least 10 years. The situation, though slightly better, is eerily similar to what we witnessed in H1FY24,” stated a results preview note from Motilal Oswal Research.

Based on reports from four brokerages, tier-I companies’ performance is expected to range from -1.5 per cent to +2 per cent quarter-on-quarter (QoQ), while midcap IT services firms are projected to grow in the range of 1-5 per cent QoQ. Analysts expect Infosys and Tata Consultancy Services (TCS) to lead growth, while Wipro and HCLTech may see flat to negative growth.

Based on analyst reports and senior management discussions, growth in Q1FY25 is not expected to be broad-based but will be driven by certain verticals.

Aiman Ezzat, chief executive officer of Capgemini Group, in an earlier interaction with Business Standard, said that though recovery is back, the uptick is slow. “If you look at the current trends, it is not about geographies but the vertical mix that companies have. Two verticals that are doing well are the public sector and health care. In Europe, we have a good presence, but in the US, we are heavy on financial services (FS) and technology, media & entertainment and telecommunications (TMT),” he said.

This was evident in the recent numbers of Accenture. For Q3CY24, in terms of vertical growth, Accenture’s FS was down 8 per cent year-on-year (YoY) at $2.89 billion, and TMT was down 4 per cent at $2.76 billion. Growth was driven by health and public services, which grew by 8 per cent YoY.

Analysts are predicting that the first quarter will lead to a slightly better FY25 compared to FY24. Sudhir Chaturvedi, president and executive board member of LTIMindtree, in a recent interaction with Business Standard, said that demand was much better now than it was at the beginning of the year.

However, many analysts remain unsure. JM Financial, in its report, said that the current environment is still difficult to call. “Q1 headline numbers are unlikely to give away any clue either… It will likely be a quarter of middling growth. Especially given 50 basis points could be added by a higher number of working days alone. We don’t expect players’ commentary to be materially different either.”

When it comes to margins, the impact will vary for each firm due to salary hikes, higher visa costs, and the ramp-up of large deals. “We forecast stable or increasing EBIT (earnings before interest and taxes) margins for large companies YoY, especially for TCS (140 basis points YoY) and Wipro (60 basis points YoY). Sequentially, margins will vary depending on seasonal factors and the wage revision cycle,” said a preview report by Kotak Institutional Equities (KIE).

Part of the commentary keenly awaited from largecap players like TCS, Infosys, HCLTech, and Wipro would be on discretionary spending, demand for deals in the generative AI space, and hiring trends. This is particularly relevant after Accenture increased its headcount by 7,882 in Q3FY24 (the financial year ends in August).

“We note some improvement in Q1FY25 in segments such as BFS, largely driven by a low base of the previous year. While the incremental cut in discretionary spend has moderated, an uptick appears unlikely with the delay in interest rate cuts and US elections on the horizon. Focus will be on indications of broader recovery in spending and a pick-up in decision-making timelines,” said the KIE report. Business Standard

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