IT firms may remain on recovery path in Q2

Photograph: PTI Photo from the Rediff Archives

The industry is exepected to have continued on the path of recovery in Q2, similar to the preceding quarter, rather than sprint towards growth.

The top four firms likely grew between 0 per cent and 4 per cent year-on-year (Y-o-Y), according to consensus estimates.

“Q2 is unlikely to change the earnings trajectory for the sector.

"While demand is improving, it is not beating existing estimates,” HSBC Global Research said in a recent note.

The earnings reports come in the wake of the US Federal Reserve cutting rates for the first time since March 2020.

Accenture — considered a bellwether for the industry — also indicated an unchanged macro environment as part of its results last month.

However, the recent deepening of the West Asia crisis is likely to add to concerns going ahead.

During the analyst’s call, Accenture chair and chief executive officer Julie Sweet said the demand environment had remained cautious.

“The macro is kind of the same… discretionary spending has not seen any significant shift,” she said.

Instead, demand uptick is happening in pockets and sectors.

This may augur well for the industry, which has suffered due to a slowdown in banking and financial sector.

After their Q1 results, TCS and Infosys said that green shoots were visible in the BFSI sector.

Analysts Abhishek Pathak and Keval Bhagat of Motilal Oswal Research wrote in a report that Q2 revenue growth was likely to be decent but could disappoint elevated expectations.

“(We) believe that the recovery will be gradual and could be initially restricted to some pockets, e.g. US banking. In that context, while we expect decent revenue growth in Q2, expectations are elevated and could lead to short-term disappointment,” they added.

TCS will kick off the earnings season on October 10, followed by HCLTech on October 14.

Infosys and Wipro are set to announce their numbers on October 17.

FY25 growth guidance

Analysts are expected to keenly watch the financial performance of Infosys.

The Bengaluru-headquartered company may raise its revenue guidance, with many expecting it to up its guidance by 50-100-basis point (bp).

Infosys has given a revenue growth guidance in the range of 3-4 per cent.

“We expect Infosys to upgrade its FY25 growth guidance to 4-5 per cent Y-o-Y in CC (constant currency terms) on likely strong H1 (first half) performance, while margin guidance is expected to be intact," said a Phillip Capital India Research note.

The sector trackers expect HCL Tech to retain FY25 guidance of 3-5 per cent Y-o-Y in CC growth along with Ebit (earnings before interest and tax) margins at 18-19 per cent.

In Tier-II firms, it expects Mphasis, LTTS, and KPIT Tech to maintain their respective growth guidance.

With Q2FY25 growth to be moderate, the December quarter historically impacted due to furloughs, and the fourth quarter being cyclically slow, the growth focus has now shifted to FY26.Moreover, this year is likely to feel the additional impact of the US elections.

Margins for Q2 will have a positive impact of 20-50 bps due to currency movement, cost measures, and no additional visa costs. Those who have given salary hikes, such as TCS, may see some drop in margins.

Hiring plans

The other positive that Accenture reported was hiring. The company hired around 24,000 people in its fourth quarter.

The firm will hire primarily in India.

This will also impact other IT players who have not yet put their hiring plans in motion.

Generative artificial intelligence (GenAI) commentary will also be keenly awaited.Accenture saw its GenAI new bookings at a new high of $3 billion and its revenue has now touched $900 million.

This augurs well for players like TCS, which has also seen a strong movement in its GenAI deals.