IT sector Q3 Results Preview: Indian tech companies are expected to report better margins however on a gradual basis in the third quarter ending December 31, 2024. The Q3FY25 results season will commence for India Inc. with two Tata Group-backed IT giants namely Tata Consultancy Services (TCS) and Tata Elxsi. However, IT stocks took a nosedive on January 3rd, despite the positive outlook for the new year 2025.
IT Stocks On January 3:
Nifty IT index dipped as much as 2%. Except for L&T Technology Services, all other tech heavyweight companies are in deep red. Wipro took the most bearish beating on Friday, nosediving by 2.65%. While shares of Tech Mahindra, TCS, Persistent Systems, Infosys, Mphasis, HCL Tech, LTIMindtree and Coforge are down by 1% to 2%.
The bearish tone in IT stocks comes ahead of Q3 results season. Tata Elxsi and TCS will be the first to declare Q3FY25 earnings on January 9. Further, HCL Tech, LTTS, and Infosys are lined up on January 13, January 15, and January 16 respectively. Tech Mahindra will announce its Q3 on January 17, followed by Cyient and Mphasis on January 23. More updates on IT Q3 results dates will follow suit.
One of the key reasons why IT stocks are falling is because the outlook for 2025 looks good but not great, as per brokerage JM Financial.
In its latest report, JM Financial stated that CY25-start has little in common with CY24's. Last year this time, the book of business was transitioning from (eroding) discretionary book to efficiency-led work. Leakages have reduced since then and mega deals' contribution is now in the base. Players need short-duration discretionary deals to pick up now to make up for declining TCV. Fed's dovish turn in Dec-23 raised hopes of faster rate cuts, triggering a re-rating in IT Services stocks then. Opposite happened in Dec-24 - hawkish tone, elongated rate-cut projections and a sell-off. In other words, a better demand environment is balanced by somewhat unfavourable comp and higher expectations.
Furthermore, JM's note said, "S&P 500 earnings growth is likely to improve to c.15% in CY25 (Source: Factset). Unlike CY24, where the bulk of earnings growth is being led by Magnificent 7, it will also be broad-based. That suggests cost pressures might ease across enterprises, paving the way for discretionary spending off-take. That said, a still gummed-up global supply-chain, uncertainty around Trump's trade policies and a sudden shift in the Fed's tonality mean long gestation (back-ended ROIs) projects may get pushed out. Our checks also suggest that IT budgets are unlikely to improve materially."
Accordingly, these different set-ups mean the construct of stock return could be different too.
JM's note added, "CY24 stock performance was led by (2)%-19% re-rating across large-caps even as FY25/26E EPS saw 1-20% cut. +1SD PER now means stock performance in CY25 should track earning upgrades. That would largely be margin-led. On multiples, we might see some mean-reversion - TCS' premium over large-caps and Auto ER&D's over mid-caps. "
IT Sector Q3 Results Preview:
Revenue Growth Expectations In Q3FY25:
Brokerage Elara Capital is predicting strong sequential dollar revenue growth in Q3FY25 for HCL Technologies, Coforge and Persistent Systems. While revenue growth for COFORGE and PSYS may be supported by a strong order book and for HCLT, by its seasonally strong Products & Platform (P&P) business.
In Q3FY25, Elara estimates HCL Tech to report sequential growth of 3.3% in USD terms, led by its P&P business. For Persistent, the QoQ USD revenue growth is seen at 3%, driven by a strong order book. In the case of Coforge, the broker expects a 3%+ growth in Cigniti and Coforge's standalone business, resulting in a 3.2% QoQ USD revenue growth (on the strong order book).
For dollar-denominated revenue growth for Tata Consultancy Services (TCS IN), Infosys (INFOSYS IN), Wipro (WPRO IN) and Tech Mahindra (TECHM IN), Elara expects a sequential drop due to furlough impact and unfavourable currency movements. Furlough impact in Q3 is expected to be normal this year.
Thereby, Elara predicts USD revenue to dip by 0.8% QoQ for TCS, due to furloughs and ebbing revenue from the BSNL deal.
Also, for Infosys, a CC / USD drop of 0.3%/1% QoQ is expected due to furloughs. But further, the ask rate to reach the lower/upper range of FY25 revenue guidance is (0.7%)/+0.25%, per Elara's calculation in CC.
In the case of Wipro, Elara said, "Q3 revenue growth guidance was within -2-0% in CC. Expect revenue to decline 0.9% (median of the guidance) in CC and USD revenue to drop to 1.5% due to cross-currency headwinds."
For Tech Mahindra, the brokerage expects growth tailwinds are seasonally strong Comviva business but continued weakness in the Telecom vertical may drag down overall revenues. Hence, a revenue drop of 0.5% in USD terms in Q3E.
Additionally, Elara's note said, to expect LTIMindtree (LTIM IN) to post a 1.5% sequential growth in CC terms in Q3FY25E.
Margins Outlook For Q3FY25:
Among the positive factors would be margin improvement for the majority of players, except in the case of LTIMindtree and Infosys.
Elara's note said, "LTIM's margin may be hit by wage hike - Expect 200bps QoQ impact on margin in Q3E. INFOSYS' margin may drop 30bps QoQ due to negative operating leverage."
With the wage hike already given in Q1FY25, TCS ' margin is expected to expand by 40bps QoQ due to deceleration in BSNL deal-related costs, which hit Q2 margins. Also, TechM's margin may improve 40bps QoQ due to cost rationalization. Expect margin to expand 50bps QoQ each for COFORGE and PSYS led by strong revenues (both have hiked wages in Q2FY25).
On the other hand, Wipro's margins may take a hit, with expectations of a 10 bps Qoq decline despite the main impact of the wage hike reflected in Q3 (salary hiked on 1 September). This is due to higher offshoring, as per Elara. Additionally, due to deferring its wage hike from July to September, HCL Tech's IT services margins may be impacted by 60 bps, likely to be mitigated by momentum in the P&P business (expect 30%+ margin in Q3E), resulting in a 40bps QoQ improvement at the company level.
IT Stocks Pick:
Elara's note said, "We prefer TCS within large-caps as valuations are comforting. We prefer LTIM in the mid-cap space, especially after a 15%+ correction in the stock price in the past month (also, as it is a play on strengths of erstwhile LTI and Mindtree). LTIM is aiming for USD 10bn revenues in FY31/32, which may not be challenging in our view, considering its prior growth rates, strong order book and healthy pipeline."
Click it and Unblock the Notifications
Sign in with Google