Results preview: IT firms may report muted Q4 growth, eyes on FY25 guidance

January-March quarter, is considered to be a soft quarter, and will continue to see the headwinds that the sector has been facing. And the sector will enter the new financial year on a weak footing

With the last quarter of 2023-24 (FY24) expected to have been soft owing to lower discretionary spend and macro uncertainty, many are hoping FY25 will be a year of recovery for the information-technology (IT) industry.
 

The fourth quarter, January-March, is considered soft, and will continue to see the headwinds the sector has been facing. And the sector has entered the new financial year on a weak footing.

Analysts are expecting Tier-I firms to report sequential growth of -1 per cent to 1.5 per cent and midcap players’ growth may range between 0.7 per cent and 4 per cent. This also means midcaps will perform better than their larger peers.

The Street will, however, look for guidance and commentary from the management of top-tier firms on the demand environment. The IT results’ season will kick off with Tata Consultancy Services (TCS) announcing its numbers on April 12, followed by Infosys on April 18 and HCLTech on April 26.

Infosys’ commentary will be awaited because the firm gives annual revenue guidance. TCS does not give any, but the firm’s commentary on hiring will be crucial in understanding demand.

Though Q4FY24 revenue growth expected to have been tepid, analysts are expecting margin improvement on the back of cost-cutting measures, low hiring, and selective salary hikes.

“For most of our coverage companies, we see year-on-year revenue growth to start recovering from Q4FY24. That said, we note that some firms continue to see the impact of project ramp-downs. We expect the Ebit (earnings before interest and tax) margin to improve quarter-on-quarter for most of our coverage due to operating efficiencies. We think FY25 guidance will be a critical near-term catalyst, along with US macro-economic indicators in the coming months,” said Kumar Rakesh of BNP Paribas Securities'.

The Nomura report expects EBIT margins for largecap companies (ex TechM) to improve 40 basis points Y-o-Y in FY25F.

As stated above, many analysts are hoping Q4FY24 will see the bottoming out of the slowdown the sector has been witnessing for the last few quarters.

“We expect FY25 to be a moderately better year, driven by reducing intensity of run-off in discretionary programs. A few green shoots are visible in financial services, benefit of large-deal ramp-ups. Clients have increased cost-take out programs which benefit companies that can deliver on integrated multiservice deals,” said a report by Kotak Institutional Equities.

But an exit on a weak footing and with macro still not recovered, many are expecting that guidance provided by players like Infosys, HCLTech, and Wipro will be weak.

The street is expecting Infosys to guide for a growth rate of 2-6 per cent for FY25. Meanwhile, though HCLTech’s strategy is different from others due to its product portfolio mix, the first quarter of the financial year is generally a softer quarter.
 

Additionally, with Accenture cutting its revenue guidance, it looks like discretionary spend will continue to be under pressure.
 

Nomura expects Indian IT companies that issue annual revenue growth guidance to start on a cautious note, keeping in mind the ongoing macroeconomic uncertainty and recent guidance cut by Accenture.
 

“We remain cautious on the sector given limited visibility on a significant turnaround in discretionary demand for IT services. We expect operating performance to vary significantly across companies in FY25F. Our FY25-26F EPS (earnings per share) are 2-9 per cent lower than the street across most of our coverage universe. We remain selective in our picks,” said the Nomura report.
 

The other takeaway from Accenture’s results was the continued pain in the sector like banking and finance, which is the largest vertical for Indian IT players. 

The Kotak Institutional Equities report reported tech budgets were under scrutiny and unlikely to increase significantly.

“Bloomberg estimates indicate that tech spends of big US banks will grow at a slower pace compared to last year. The positive is pace of run-off in discretionary programs has reduced. Cost take-outs have increased, benefitting players with full-service models. The guidance of Accenture and other firms such as CTSH, Capgemini and EPAM indicate low hope of near-term recovery in spending,” said the report.

In focus

TCS

> Demand outlook for BFSI, retail, telecom and the US; deal pipeline; margin levers; hiring targets; GenAI deals

Infosys

> Revenue guidance for FY25; outlook for BFSI, retail and US; update on deals; GenAI deals

HCLTech

> FY25 revenue and margin guidance; outlook on product and platforms; large deal sign-ups and ramp-up

Wipro

> Revenue guidance; management commentary on Capco business; people movement, hiring and impact of recent exits