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Q1 result review: Outlook positive for IT companies, challenges persist

July 30, 2024 14:17 IST

The first quarter results (Q1FY25) of Indian IT services hint towards better fiscal growth than the preceding year, but as the management commentary said, “there is still some time for the industry to be firing on all cylinders.”

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Among the majors—Tata Consultancy Services (TCS), Infosys, HCLTech, and Wipro—it is the Bengaluru-based Infosys that has performed better, which was also evident in its full-year revenue guidance.

 

The impact of the results of the top player was evident on the Sensex as well.

Benchmark indices notched up new record highs on July 18, with the benchmark Nifty nearing the 25,000 mark, boosted by a rally in information technology (IT) stocks on earnings optimism.

TCS, Infosys and HCLTech managed to beat estimates, Wipro’s number missed Street estimates, especially on revenue growth.

Infosys revised its full-year guidance in the range of 3 to 4 per cent from its earlier 1 per cent to 3 per cent.

This revised guidance also includes an inorganic strategy.

Infosys also showed an improvement in revenue, profits, and margins.

Even though the top players have indicated some way that they can see green shoots, they have in the similar tone also said it is still too early to call out if the growth seen in Q1FY25 can be sustained for the full year.

“We are confident that FY25 will be better than FY24.

"And that is based on how FY24 has panned out and how we started seeing the early quarter of FY25.

"But it does not mean that the uncertainty has gone. We still see situations where clients are ramping down programmes or re-evaluating programmes at short notice.

"That is the reason we believe it is too early to call a sustained growth momentum or a demand stability,” said K Krithivasan, chief executive officer and managing director, TCS in a post-results analysts call.

The commentary of all top four firms when it comes to discretionary spends is similar.

Salil Parekh, chief executive officer (CEO) and managing director of Infosys also maintained that there has been no major improvement in discretionary spends.

“Discretionary spends still remain similar to where we were when we started the year, which is still in a difficult situation,” he said to analysts.

Similarly, Srini Pallia, CEO, Wipro also gave a short-term view on growth. He said that Q2 looks better than the start of Q1, but he also added that discretionary spends were still slow.

Generative AI, which many thought could fuel growth, is yet to show its impact on the numbers.

For instance, Accenture said its GenAI pipeline has touched $2 billion but the revenue from this is just about $500 million.

Parekh also said that even if they are working on GenAI projects the overall size of these deals are not large revenue projects.

It is similar to what Krithivasan had also said.

The weakness in the demand environment was evident. For instance, in TCS and Infosys there was a one-off boost in performance of its India geography.

In the case of TCS it was the BSNL deal and in the case of Infosys, it was a one-off revenue bump up in India. But for both these firms India is a very small component of the overall revenue.

“Infosys’ FY25 revenue growth guidance upgrade was largely driven by a one-time India business spike and inorganic impact, but strong deal wins should improve its medium-term growth outlook.

"It has maintained its margin guidance, but continues to see upside potential in the medium term, which we see as encouraging,” said a report from Motilal Oswal.

A BNP Paribas report on TCS said: “With recovery visible in key verticals and geographies, and confidence in driving margin through pyramid rationalisation, productivity gains, and utilisation, we see TCS delivering strong earnings growth and benefiting from an overall demand recovery.”

Though TCS and Infosys both said BFSI, which is the largest vertical in terms of revenue, in the US is moving positively, HCLTech was mostly bullish.

The company said that though discretionary spends are yet to be meaningful, Q2 FY25 will see overall growth.

In the BFSI segment, HCLTech growth was an aberration to others.

On a year-on-year basis BFSI grew 8 per cent.

On a sequential basis, it was down 1.3 per cent but that was also because of the State Street divestiture.

The positive trend in the first quarter of FY25 was the hiring trend.

All the top four players said they are heading to campuses for hiring.

One reason is the utilisation at most of these firms is at an all-time high. Hiring freshers also means that the companies are expecting demand to revive.

TCS said it will be hiring 40,000 employees in FY25, and reported adding headcount in Q1 after three straight quarters of a declining headcount.

Similarly, Infosys and Wipro were seeing headcount decline for six consecutive quarters of falling headcount announced fresher level addition of engineers in the company.

Both firms added they will finish inducting these freshers who have seen delays in their joining dates.

Shivani Shinde
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