FY25 revenue growth of a few large IT companies likely to touch 10%

A few large Indian IT services companies are expected to see a recovery in revenue growth at 9-10 per cent in FY25 from 4-5 per cent projected in FY24.

This is due to a ramp-up in recently-signed mega deals, a strong pipeline of cost take-outs, and improvement in discretionary spending, according to a Kotak Institutional Equities report.

“Infosys, HCLTech and Tata Consultancy Services (TCS) have been beneficiaries of such deals. We believe deal flow has steadied after transition from discretionary spending-powered short-tenured programs to larger programs fuelled by cost take-outs, which have longer sales cycles. We expect the continuation of cost take-out deals in calendar year 2024 (CY24), along with an improvement in discretionary spending,” the report stated.

Last week, Infosys signed a contract worth $1.5 billion with a global company for 15 years to provide enhanced digital services, leveraging its artificial intelligence (AI) solutions. This was the fifth mega deal for Infosys in this financial year.

Last month, TCS announced a strategic partnership valued at £800 million (about $1 billion) over the next five years with the digital unit of Jaguar Land Rover (JLR). Earlier this year, it had signed a contract worth $1.9 billion for a period of 18 years, with UK’s National Employment Savings Trust (Nest).

In August, HCLTech signed a mega technology deal worth $2.1 billion with Verizon Business for managed network services, which it says is the largest services deal and a significant milestone for it.

“We expect the focus on self-funding investments to modernise technology through cost take-outs, prevalent during pre-Covid, to return in CY24. Companies with the service portfolio catering to discretionary spending and heft in managing cost take-out themes such as rebadging, offshoring/nearshoring, captive carve outs, application rationalisation and vendor consolidation stand to benefit the most,” analysts at Kotak said.

“We believe TCS and Infosys are best positioned among large companies; HCLTech has a strong positioning in areas such as infrastructure services and engineering and R&D.”

Margins of IT companies are expected to show gradual improvement as they focus on cost optimisation.

“Key margin levers include increasing utilisation — weak demand and low attrition have reduced the ability to deploy freshers on programs and rationalise pyramid, infusing more automation in operations and reducing average cost of resource. Certain companies have tweaked wage hikes and variable pay to keep expenses in line with revenue,” the report said.

Growth will not be democratic and but will depend on many factors. They are vertical mix, services mix, ability to win large/mega deals and defend share in key accounts, and exposure to impacted clients.

“Banking and financial services (BFS), telecom and hi-tech were the most-impacted verticals in CY23. Hi-tech is showing early signs of recovery. BFS firms have benefited from the high net interest income, but have lower willingness to spend due to high macro concerns. We expect growth acceleration in BFS and hi-tech in CY24. Telecom may remain a laggard except for the ramp up of mega deals. Manufacturing, a resilient vertical in CY23, could come under pressure in CY24,” the Kotak report stated.