IT firms likely to post growth in Q1 on back of improved biz sentiment

Bengaluru: India’s IT sector behemoths are expected to show an improvement in their April-June quarter revenues, on back of improved business sentiments in North America and Europe. However, with the sectoral slowdown just about abating, the companies may not upgrade their 2024-25 (FY25) outlook, analysts told DH.

The IT earnings kicks off with Tata Consultancy Services (TCS) reporting on July 11, followed by HCL Tech (on July 12), Infosys (July 18), Wipro (July 19) and TechMahindra (July 25). 

“Q1 (April-June) is expected to be better on a year-on-year basis, with a single-digit improvement. On a sequential basis, management and operating model changes are expected to help several vendors regain momentum,” said Biswajit Maity, Senior Principal Analyst at Gartner.

Experts are largely of the view that while long-term outlook will remain positive, the IT majors are being cautious given the long sectoral slowdown over the past couple of years.

On possible improvement in discretionary spending by the tech companies, analysts differ. Neeti Sharma, chief executive officer of TeamLease Digital said that she expects a pick up of around 30 per cent-40 per cent after seeing a downward trend for a year.

However, others believe that spending might have taken a hit, given that the US markets are performing relatively weaker than their European counterparts, while accounting for a bulk of the leading IT companies’ revenue.

“We are watching out for growth momentum on a quarterly basis as well as near-term guidance which has remained sluggish in the past few quarters, with a few companies even falling on the negative end in terms of growth outlook,” said Deepak Jotwani, Vice President & Sector Head at ratings and research firm ICRA Ltd.of research and ratings firm ICRA Ltd.

On profitability, analysts are untroubled as they do not see any major pressure with expected healthy EBITDA margins. “Inflationary pressures, wage costs and other issues have also settled down,” Jotwani said.

Hiring outlook key

On the hiring front, analysts are divided, with some expecting an increase, but others seeing stable attrition rates comparable to the past few years

“Contractual hiring has seen an uptick of about 35 per cent-40 per cent on a year-on-year basis. Global Capacity Centres (GCCs) are hiring more than IT companies with domain-centric skill sets, especially catering to AI,” said TeamLease’s Sharma.

Engineering and research and development roles continue being in demand, while hiring has picked up in cloud and cybersecurity as well in data analytics and security roles, she added.

However, ICRA’s Jotwani said that aggressive hiring in FY2022 and H1FY2023 led to a break the following year, a trend which is expected to continue over the initial quarters of FY25.

“In fact, negative net addition on the employee front was witnessed in most IT services companies. However, in tandem with revenue visibility and growth momentum, hiring at a broader level could pick materially up after two-three quarters,” Jotwani said

Companies are also expected to be bullish on Gen-AI. As per Gartner, between 2023 and 2027, an estimated $3 trillion will be spent on AI. However, IT companies are still struggling to  find clarity on what it is, or the risks associated with its use.