IT industry Q2 results preview: TCS, Infosys likely to lead revenue growth, margins to remain mixed

Indian information technology (IT) companies expect earnings growth to improve in Q2 FY25 compared to Q1. This growth is expected to be driven by rising hyperscale growth momentum, strong performance in North America after a period of stagnation, and positive trends in the healthcare industry. While analysts are optimistic about shifts in customer spending behavior, they expect a gradual recovery that may initially be limited to specific segments.

Tata Consultancy Services (TCS), India’s largest software services exporter, is scheduled to announce its second-quarter results on October 10, 2024. The IT services provider said its board will also consider paying a second interim dividend for fiscal 2025 on the same day.

Brokerage firm Motilal Oswal Financial Services has forecast IT stocks’ total revenue to grow by 5.1% year-on-year, EBIT by 5.0% and net profit by 5.3% in the July-September quarter of FY25.

For Tier 1 companies, revenue growth is expected to be in the range of flat to +3.0% on a quarter-on-quarter (QoQ) basis in constant currency (CC) terms. Meanwhile, secondary companies’ revenue is expected to grow flat at +4.5% sequentially.

“However, mid-cap companies should continue to perform well, especially those with strong offerings in data engineering and ERP modernization, and we expect their growth performance to continue over the medium term,” the brokerage said.

It expects cross-currency tailwinds for IT companies to increase by 30-60 basis points (bps) sequentially. As wage increases have been postponed to the second half of fiscal 2025, industry profit margins are expected to remain largely range-bound in the second quarter of fiscal 2025.

Customer spending behavior showed positive trends, indicating a potential return to modernization and discretionary spending, albeit in some areas.

revenue growth

MOFSL expects Infosys and TCS to report relatively strong quarter-on-quarter growth of 3.0% and 1.0%, respectively, in CC terms, while HCL Technologies is expected to post flat growth in Q2FY25. Tech Mahindra and Wipro are also expected to post flat quarter-on-quarter growth, while LTIMindtree is likely to post healthy growth of 3.0%.

Among mid-cap companies, MOFSL expects Persistence Systems to lead the way with quarterly revenue growth of 4.5%, driven by continued growth momentum in the healthcare industry. Coforge is likely to have a strong quarter, growing 4.0% sequentially, while Mphasis is expected to grow 2.0% sequentially.

margin

TCS’s EBIT margin is expected to decline marginally by 20 basis points sequentially, mainly due to increased BSNL transactions and investments in talent development and training. HCL Technologies’ margins are likely to improve slightly, although rising wages may pose headwinds in the second half of FY25.

For Infosys, margins are expected to fall by 80 basis points in the second quarter as one-time gains and reversal of investment in large deals will impact profitability. Tech Mahindra’s margins are expected to improve by 50 basis points, while Wipro’s are expected to decline slightly.

MOFSL expects a mixed performance among mid-sized IT companies. Coforge margins are expected to decline by approximately 100 basis points, primarily due to the impact of higher wages, while higher volume transactions and higher wages will put pressure on margins, although optimization measures will help offset this pressure on the durable system.

MOFSL said Mphasis’ margins are expected to remain range-bound, driven by offshoring and favorable labor pyramid structure, while L&T Technology Services is expected to post 90 basis points growth on a sequential basis.

IT industry hot picks

Among Tier 1 IT stocks, MOFSL prefers HCL Technologies and LTI Mindtree as they have strong capabilities in data engineering, ER&D products (HCLT) and ERP modernization, well suited for pre-GenAI spend.

MOFSL said its portfolio of discretionary and non-discretionary businesses should also support growth in the current business environment.

For second-tier suppliers, Motilal Oswal’s top choices are Persistent Systems and Coforge, both of which have strong performance.

Persistent Systems benefits from its focus on high-growth industries such as BFS and healthcare. MOFSL said that for Coforge, despite the uncertainty surrounding the Cigniti integration, we believe it can realize cost synergies sooner than expected, which brings upside risk to our forecast.

Disclaimer: The above views and recommendations only represent the views and recommendations of individual analysts or brokerage firms and have nothing to do with Mint. Investors are advised to consult a certified expert before making any investment decisions.