Q1 results preview: Indian IT companies may post higher revenue growth
Indian IT companies are expected to register revenue growth for Q1 of FY25 higher than Q4 of FY24 as the demand environment is showing positive signs
The Indian Information Technology (IT) industry will kick off the earning season starting with Tata Consultancy Services (TCS) today but the expectations are modest and the first quarter results for FY25 could set the tone for the fiscal.
The Indian IT industry recorded a below-par performance for FY24 given the challenging macro environment of slowing demand and now the expectation is that the revenue growth could rise as much as 2% for the first quarter.
Brokerage house Philips Capital in its note said, “Q1FY25 is expected to be a decent quarter for the IT Services sector. Select Tier I and Tier II companies should witness acceleration in growth driven by deal ramp ups. We expect -2.0% to +2.5% qoq CC revenue growth for Tier I companies and -1.0% to +4.7% qoq CC for Tier II companies.”
BNP Paribas noted, “In our large-cap coverage, we expect 1QFY25 revenue to increase 0.4% to 2.2% q-q CC, but HCLT to report a decline. We see mid-caps in our coverage reporting 1.6-5.5% q-q CC revenue growth.”
This should come as a welcome relief for the Indian IT industry after recording flat revenue growth in the comparable previous quarter—the fourth quarter of FY24. In the three months since, there has been certain change in the macro environment as there are few visible signs of demand coming back.
Deven Choksey Research in its note said, “Q1FY25E will likely be slightly better than the previous quarters. The sector could witness some early signs of growth.”
It further added that these early signs of growth are likely to be driven by lower cuts on discretionary spending and emerging opportunities in AI, consulting, engineering research and development (ER&D), healthcare, banking, financial services, and insurance (BFSI).
The BFSI segment is the largest revenue generator for the Indian IT industry and its spending on technology has been subdued. The expectation is this segment will start to make investments into digital services and AI going forward.
The key trigger for growth will be the increase in discretionary spending on technology. As Philips Capital noted, “We believe discretionary demand may not deteriorate further and as timing of interest rate cuts get clear, outlook on discretionary spending will improve. Gen AI adoption can likely improve demand for cloud and data services.”
However, this slightly positive outlook on revenue growth may not actually translate into improved operating profit margins for some of the companies given the wage hikes and other investment costs for the Indian IT companies.
BNP Paribas, in its note, said, “We expect EBIT margin to expand q-q for most of our coverage companies, except for TCS, HCLT and PSYS.”
The key factors to watch out for during the announcement of the first quarter results will be the companies commentary on the demand environment, deal flow, hiring plans and investments into newer technologies.
Deven Choksey Research said, “The announcements of large and mega deals have generally fallen short of our expectations for most companies. However, it is expected to bounce back in Q2FY25E or H2FY25E.”
The expectation is that Indian IT companies would provide modest revenue guidance and could revise this upwards if there is any positive change in the external environment.
Edited by Affirunisa Kankudti