The earnings season begins on Thursday, October 10 with the announcement of results by Tata Consultancy Services (TCS).
The sector is coming out of a severe trough cycle and the recovery could be far sharper than expected, BNP Paribas said in a brokerage note. Over the last decade, companies have delivered high-single-digit revenue growth during the usual cyclical recoveries and it could be the same this time around, BNP said, summing-up the current trends in Mark Twain’s words – “History doesn’t repeat itself, but it often rhymes”.
JM expects large-cap IT Services players (top-6) to report 0-3.5% constant currency QoQ growth in the . USD revenue growth could be higher by 10-80 bps. Dollar Index (DXY) has corrected by 2.4% over the past three months, turning cross-currency (Joker in the pack) into a tailwind, it said.
Among large-caps, JM expects Infosys to report the highest cc QoQ growth at 3.5%. Wipro and TCS (ex-BSNL) could report flat growth, weighed down by demand slowdown in the EU/UK. Among the midcaps, momentum in KPIT Technologies (4.6% cc) and Persistent Systems (4%) should continue while Coforge’s reported growth could be higher as it consolidates Cigniti this quarter.BNP Paribas estimates midcap to grow ahead of largecaps. For largecap companies under its coverage, this brokerage expects 2QFY25 cc QoQ organic revenue growth between 0.2%-1.5% while mid and smallcap coverage reporting 2%-4% QoQ dollar revenue growth. Volume growth and continued ramp-up of recently won large deals should aid revenue growth for some companies.
Echoing a similar sentiment, Nuvama Institutional Equities said that it sees Q2FY25 to be likely a stable quarter, with a gradual improvement in growth and commentary from companies. Revenue growth is likely to be in the positive territory for almost all companies (-0.2% and +3.9%) – alluding to an overall improving environment, brokerage note said.
Quality Tier-2 companies shall continue to outstrip their larger peers, Nuvama said as it estimates deal flow for the overall IT sector to be stable, leading to a recovery in the coming quarters.
The earnings season begins on the heels of a 50 bps rate cut by the US Federal reserve with the likelihood of another 50 bps cut this year.
Nuvama expects discretionary spends to recover hereafter and sector growth to revive as this could trigger improvement in deal-to-revenue conversion.
On the margins front, JM expects large-cap players to report 0-70 bps QoQ Earnings Before Interest and Taxes (EBIT) margin movement in the July-September quarter. “Barring Wipro (one month impact) and TCS (given in 1Q), wage hike has been pushed out by other large-caps. That reflects sustained pressure on margins and a still benign supply environment,” the preview note said.
BNP Paribas expects EBIT margin performance to be mixed on the sequential basis. The recovery seen in the BFSI sector last quarter is expected to pick up pace in 2QFY25.
Outlook
JM expects Infosys to raise its FY25 guidance to 4-5% cc, up from 3-4% currently, implying 0-1% CQGR through 2H. Meanwhile, WPRO is likely to guide for -1% to +1% cc QoQ growth, baking in the impact of furloughs. Meanwhile, HCL should retain its 3-5% guidance as seasonal strength in software business is balanced by anniversary impact of Verizon deal (Q4). “We expect deal wins to be steady, though track below the record FY24 run-rate,” the JM note said.
The industry is now coming out of a low base, which is a favourable set-up to see a strong cyclical recovery of the sector, BNP Paribas said, adding that if the demand catalysts such as GenAI led demand acceleration, materialise, one would see significant upside risks to revenue growth of major IT Services companies.
Stock recommendations
Investors should therefore pick stocks where earning visibility/valuation comfort is higher, JM recommends. Its preferred picks are Infosys, Tech Mahindra and Wipro in the largecap space while Persistent and KPIT in the midcap segment.
Meanwhile, Nuvama remains positive on LTIMindtree, Infosys, Persistent, Mphasis, Coforge, TCS and HCL Technologies.
Earnings stabilised for IT in the April-June quarter despite Nifty reporting a sub 5% growth in Profit After Tax (PAT) the said quarter.
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(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)