IT Sector Q1 Preview: TCS, Infosys, Wipro, HCL In Focus; Could Tech Players Earnings Escape From Macro Risks?

Indian tech companies are all set to announce their Q1 results for FY25 with Tata Group-backed midcap IT player, Tata Elxsi kickstarting the season on July 10 followed by Tata's flagship and largest IT firm, TCS on July 11. In Q1FY25, the sector is likely to witness recovery in key businesses like BFSI, Manufacturing, Telecom, Retail, and Hi-tech. However, broadly the growth is anticipated to be moderate with weaker discretionary spending, still being the biggest elephant in the room. On the other hand, deal wins of tech companies are seen to be resilient.

Broadly, IT sector's Q1FY25 is expected to be better than the preceding quarter.

For the IT sector, in Q1FY25, Axis Securities said, "sector is anticipated to exhibit moderated growth in Q1FY25, primarily due to weaker discretionary spending, driven by uncertainties in macroeconomic conditions and upcoming elections in the US."

However, the brokerage believes that non-discretionary spending is expected to see some improvement. It expects large companies to prioritize cost optimizations, resulting in an increase in cost take-out deals, vendor consolidation, and reduced discretionary spending.

On segment-wise, Axis Securities expects a recovery in BFSI, Manufacturing, Telecom, Retail, and Hi-tech, and sees new deal ramp-ups to contribute to the growth momentum.

Axis believes that the sluggish growth trend is bottoming out with no further decline in demand anticipated. This is paving the way for a strong recovery in the near term.

Hence, the brokerage said, "H2FY25 is likely to witness better engagement and higher growth momentum compared to H1FY25."

Coming to deal wins, Axis Securities believes that it will continue to be resilient in the quarter, driven by strong demand for emerging technologies such as Generative AI, Machine Learning, Cloud Transformation, and Digital Transformations.

Meanwhile, Incred Equities expects Tier-I IT services companies to report an average 0.8% QoQ constant currency (CC) revenue growth in 1QFY25F, as the ramp-up of deals won earlier outweigh the quantum
of discretionary project roll-offs.

However, Incred also believes that reported growth in US terms could be lower as the US appreciated an average of 0.5% vs. the GBP () and 0.9% vs. the Euro (), respectively.

On company-wise performance, JM Financial said, "We expect -2% to +2.1% cc QoQ growth print for large-caps. Both
extremes (INFO at the upper and HCL at the lower-end) are due to specific factors. Those aside, it will likely be a quarter of middling growth. Especially given c.50bps could be added by a higher number of working days alone.."

While Incred added that deal ramp up and absence of one-offs could aid Infosys' revenue (up 2% qoq cc) while HCL
Technologies' revenue could decline by 1.2% QoQ in CC terms, largely due to seasonal pass-back of productivity benefits. The growth of Tata Consultancy Services or TCS could be 1% QoQ while Wipro & Tech Mahindra's sequential growth could be muted.

For Tier-2 companies, Incred said, US$ revenue growth could be slightly higher at an average of 0.9% QoQ led by Persistent Systems (PSYS) while weak seasonality in the SWC business could impact L&T
Technology Services (LTTS).

To investors, JM suggested that they should therefore read between the line (items) to gauge demand. The sequential improvement in BFSI and stability in Telecom/Hi-tech could be positive signs. Pick-up in attrition and moderation in headcount decline would also signal trough formation.

JM's note added, "For select mid-caps on the other hand, growth might accelerate. We expect PSYS/KPIT to report an impressive 5.5%/4.6% cc QoQ growth.
The adverse cross-currency impact could lower the reported USD revenue print. We expect margin performance to vary across players, with large caps showing better resilience. A still patchy outlook informs our preference towards stocks where expectations are better aligned (INFO/WPRO). TECHM remains a BUY on turnaround hopes while KPIT/TATATECH are structural bets on the Auto ER&D theme. INFO/TECHM/KPIT could surprise positively in 1Q."

Furthermore, Incred said, "1QFY25F is unlikely to drive the upgrades but could limit the downgrades and potentially change the messaging, while the continuation of this trend in 2QFY25F could improve the visibility & drive FY25F upgrades. Although the recovery in discretionary projects, if any, is positive for Tier-I companies, given their favourable valuations, select Tier-II companies could benefit too."

Overall, Axis Securities expects IT services to report revenue growth in the range of -1% to 2% QoQ in the US$ terms. In rupee terms, the brokerage expects the sector to deliver QoQ revenue growth of -1% to 2.4%. Margins are likely to witness some expansions on account of easing supply-side constraints and lower onsite
expenses.

Key monitorable during tech companies Q1 announcement as per Axis Securities are --- Management commentary on critical issues such as 1) Outlook on client spend, especially on the BFSI vertical, 2) Vertical outlook,3) Rising subcontractor costs, and 4) Pricing pressure on realizations.

Tata Elxsi is going to declare its Q1 on July 10th, while TCS is scheduled on July 11. Further, HCL Tech and Info Media are going to declare its Q1 on July 12, while LTIMindtree will announce its Q1 on July 17. Also, Infosys, Persistent Systems, Mastek, Tata Technologies and L&T Tech Services will announce their Q1 results on July 18. Additionally, Wipro will present its earnings on July 19.

Moreover, companies like Zensar Tech will declare their earnings on July 22, and KPIT Tech on July 24, whereas, Tech Mahindra and Mphasis on July 25.