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Published: June 24, 2024
Updated: June 24, 2024

Q1 Results Preview: Key Expectations for Leading Indian IT Companies

Overview of IT Sector Performance

As we approach the Q1 results for major Indian IT firms, analysts anticipate a mixed performance across the sector. Analysts project a modest yet steady quarter for companies such as Infosys, Wipro, TCS, Coforge, Birlasoft, LTIMindtree, and Mphasis. Despite the challenges, the elevated PE multiples suggest a potential earnings upgrade cycle for FY25 or strong equity flows.

Tier 1 IT Companies: Key Focus Areas

For Tier 1 IT players, the spotlight will be on several critical aspects. Investors and analysts are keen to see signs of recovery in discretionary spending and the timeline for a demand resurgence. Additionally, there will be scrutiny on whether the total contract value (TCV) to revenue conversion issues persist and updates on large deal ramp-ups amid recent project cancellations. Commentary on hiring trends will also be closely watched.

Tata Consultancy Services (TCS):

Analysts expect TCS to report a 1% QoQ revenue growth in constant currency terms, driven by strong order inflows over the past year. However, a cross-currency headwind of 50 basis points is anticipated. The EBIT margin is projected to contract by 210 basis points QoQ to 23.9%, impacted by salary hikes and potentially rising sub-contractor costs. The TCV for Q1FY25 is expected to exceed the guided range of $7-9 billion.

Infosys:

Infosys is likely to reaffirm its revenue growth guidance for FY25 in the 1-3% constant currency range, with margin guidance staying between 20-22%. The company is projected to report a 2.5% QoQ revenue growth in constant currency terms, with cross-currency headwinds of around 50 basis points. The EBIT margin is expected to remain flat at 20.1%. The anticipated TCV for Q1FY25 is between $3-4 billion.

HCL Technologies:

For HCL Technologies, the revenue growth guidance for FY25 is expected to remain at 3-5% in constant currency terms, with margin guidance at 18-19% EBIT. The company is predicted to achieve a (0.5%) CC QoQ revenue growth, aligning with the midpoint of its guidance, despite a cross-currency headwind of 70 basis points.

Wipro:

Wipro is expected to see a (0.5%) CC QoQ revenue growth, consistent with its guidance range. The firm will likely face a cross-currency headwind of 70 basis points.

Tech Mahindra:

Tech Mahindra is projected to achieve 1% CC QoQ growth, although the CME vertical (37% of sales) may show weakness. Slight improvements are anticipated, with the TCV for Q1FY25 expected to surpass the $500 million reported in Q4FY24, remaining below the guided $700-1000 million for five consecutive quarters.

Tier 2 IT Companies: Key Developments

Among Tier 2 IT firms, the focus will be on sector-specific recoveries and strategic updates. Analysts will look for signs of recovery in the mortgage BFS segment for Mphasis, high TCV numbers from Persistent Systems, and updates on Coforge's Cigniti acquisition. Additionally, Birlasoft's growth trajectory in FY25 and Zensar's revenue and margin outlook will be under scrutiny.

Market Sentiment and Outlook

After outperforming Nifty by 410 basis points in 2023, Nifty IT has underperformed by 910 basis points year-to-date, though it has recovered 630 basis points on a month-to-date basis. Analysts maintain an ‘Underweight’ stance on the IT sector, citing a ‘slower for longer’ demand environment and potential risks to current consensus estimates.

The upcoming Q1 results will provide crucial insights into the performance and strategic direction of leading Indian IT companies. While revenue and margin guidance are expected to hold steady, the outlook for the second half of FY25 remains uncertain due to various economic factors. Investors will be keenly watching for any indications of a turnaround in demand and discretionary spending, as well as updates on large deal wins and hiring trends.