Logos of TCS, HCLTech and Wipro
Credit: Reuters Photo
Bengaluru: The October-December quarter is most likely to remain subdued for India’s IT sector, analysts told DH. The third quarter is a seasonally weak quarter for IT companies due to holiday furloughs, and fewer working days, all of which may impact revenue. While there's optimism on revenue visibility, analysts are certain that it will take a few quarters to see a full recovery in the performance.
The earnings season kicks off with TCS on January 9, followed by HCLTech on January 13, Infosys on January 16, and Wipro and Tech Mahindra on January 17, among the Indian IT giants.
“TCS, LTIMindTree and Infosys are likely to report muted earnings primarily due to margin pressure because of wage hike and the BSNL deal (for TCS). HCLTech, Coforge and Persistent Systems can see some positive growth, hence, we continue to maintain a neutral stance,” said Nabanita Dutta, Head - media content and technical research, Anand Rathi Wealth.
For the July-September quarter (Q2FY25), TCS had reported a sequential decline of 60 basis points in its operating margin at 24.1%, due to high expenses owing to its large deal with Bharat Sanchar Nigam Limited.
While the current fiscal year has largely seen positive net additions after seven quarters of negative additions, experts estimate hiring to pick up gradually. However, it will still not reach the levels seen during Covid. Any increase in hiring will also be an indication of IT companies being slightly more optimistic about future order inflows.
“These companies overhired people which is where they've been moderating over the last 12 or 18 months but now that utilisation is at nearly optimum levels. Hiring will come back but it will be a measured increase, gradually which is directionally a positive signal,” said Pankaj Muraka, Founder, Renaissance Investment Managers.
United States President-elect Donald Trump coming on board will also be a key monitorable for American businesses. Even though it will not have an impact on Q3, it will be a key factor going ahead as it could lead to shifts in immigration policies, trade regulations, and corporate taxation.
Sectoral experts largely remain neutral in the change of leadership having an impact on IT companies at home.
“These firms have emphasised their robust global delivery models and substantial investments in localisation, including hiring and training talent within the US. While policy changes may necessitate some adjustments, their focus on delivering value will ensure that they stay aligned with evolving client priorities,” observed Krishna Vij, Vice President, Teamlease Digital.
Client spending may open up
So far, clients have remained cautious on discretionary spending, which is expected to open up with the new leadership on the back of relaxed taxation and a surprisingly supportive stance towards the H-1B visa programme. A positive change in corporate tax might not translate into better growth immediately may start showing from the first quarter of next year.
Another key monitorable will be the banking, financial services, insurance industry (BFSI) segment which has started to recover in the US.
“If there’s a correction in the Fed rate alongside stabilisation in the economy with the new government coming in - it will further provide some buoyancy to the overall sector and maybe help the fortunes for the industry in general,” highlighted Deepak Jotwani, Vice President and Sector Head at ICRA.
Moreover, artificial intelligence (AI) continues to be another key monitorable, given its rising demand among clients of the IT service providers, even though it is at a nascent stage currently.
“The projects that Indian IT companies are doing on AI are very small in size but as use cases get established these projects will go into implementation and execution, which is where the AI driven order flows will start coming up. On a more long term basis (2-5 years), I think AI will become a big driver and contributor to business for IT services companies,” added Muraka.