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Q1FY25 revenue growth is likely to reflect seasonal strength and benefits of large deal ramp ups, although discretionary spending remains weak. We expect YoY growth trajectory to show improvement on the back of large deal ramp ups, broadly stable demand environment, and no further deterioration in discretionary spending. Delay in decision-making on account of macroeconomic uncertainties continue to restrict meaningful pick-up in growth momentum. Margin performance is likely to be mixed depending on wage-hike cycle (few select companies), higher travel costs, and transition costs of large deals. Commentary on recovery in demand will be keenly watched to gain confidence on sustainable improvement in YoY revenue growth trajectory. Large deal announcements reflect some moderation in deal wins in Q1. Going ahead, we believe the interest rate cuts will act as a trigger for revival in discretionary spending and an uptick in technology spending. NIFTY IT underperformed the broader market by ~4% over a period of 3M due to delayed demand recovery. However, it outperformed over a 1M period due to the recent portfolio shift after the election outcome, and hope for better CY25. We continue to prefer large caps over mid-caps. Our pecking order is INFO, HCLT, WPRO, TECHM, TCS, and LTIM in large caps. Among mid-caps, we prefer BSOFT, FSOL, MPHL, CYL, and Zomato.

Revenue growth to reflect seasonal uptick

We expect revenue growth to improve sequentially for most companies under our coverage universe on the back of seasonal strength, benefits from large deal ramp ups, and stability in the BFSI vertical. We expect select mid-cap companies to outgrow large caps; however, overall growth between large caps and mid-caps is expected to narrow on sequential basis in Q1. For Tier-1 companies (except WPRO and HCLT), we estimate revenue growth of 0.6-2.0% QoQ while mid-caps (except LTTS and CYL) are expected to grow 1.0-5.0%. Among verticals, select companies highlighted early green shoots in BFSI (particularly in North America) in Q4FY24, and the trend continued in Q1 as well. Healthcare and Manufacturing are expected to remain relatively resilient. Communications should benefit from large deal ramp ups in select companies, although the underlying demand remains weak. Deal wins should moderate this quarter. We expect INFO (1-3% CC YoY; 20-22% EBITM) and HCLT (3-5%; 18-19% EBITM) to retain their FY25E guidance. We expect WPRO to guide for -1% to +1% growth for Q2FY25E. Margin trajectory to vary basis companies Margin performance is likely to be mixed depending on wage-hike cycle (few select companies), higher travel costs (visa costs), and large deal transition costs. EBITM trajectory on YoY basis should be stable/show improvement for most of our coverage companies. For Tier-1 companies, we expect margin swing of -150 to 100bps QoQ, while the same for Tier-2 companies should be -90 to 40bps QoQ. Attrition is again expected to remain steady, whereas lateral hiring trends should remain muted given uncertain demand.

Key monitorables

1) FY25 revenue/margin guidance, 2) Recovery in discretionary spending, 3) Pace of decision-making, 4) Demand trends in key verticals of BFSI, Retail, Manufacturing, Communications, and Hi-Tech, 5) Deal intake and pipeline, 6) Attrition and hiring trends, 7) Progress on Gen AI, 8) Pricing environment, and 9) impact of insourcing/GCC on growth.

Deal wins to moderate

Deal wins are expected to moderate in Q1FY25 based on large deal announcements, barring WPRO (signed deal with Nokia, and a USD500mn deal with a US telecom service provider). The construct of the deal wins should also remain similar to prior quarters, with cost takeout and vendor consolidation deals maintaining dominance. The deal pipeline remains healthy across companies and improvement in decision-making and revival in discretionary spending may drive acceleration in deal wins.

Earnings revision and valuation

After a weak FY24, which was impacted by slower pace of discretionary spending, FY25 should benefit from large deals ramp ups and no incremental deterioration in discretionary spending; however, no meaningful change in the demand scenario would restrict upside. Among verticals, select companies highlighted early green shoots in BFSI (particularly in North America) in Q4FY24, and the trend continued in Q1 as well. ACN maintained the mid-point of its FY24 revenue growth guidance, reflecting a broadly stable demand environment. Most global IT companies have highlighted that growth will gradually improve through the year as stable demand environment would support improvement in growth over a weak base. We expect the start of the interest rate-cut cycle to act as a signaling trigger for clients to gain confidence on the inflation trajectory and macro stability, which may drive demand recovery and an uptick in discretionary spending. We have revised the earnings estimates (Exhibit 4) for our coverage universe factoring in the Q1 performance and FY24 annual reports (for select companies). We have incorporated Cigniti transaction and the recent QIP in Coforge estimates. We also roll forward the valuation to Jun25E across our coverage universe. We do not expect any material revision in FY25E revenue growth guidance (except CYL) as the demand environment remains largely stable since the last quarter. For WPRO, we expect the company to guide for -1% to +1% growth in Q2FY25E. Our pecking order is INFO, HCLT, WPRO, TECHM, TCS, and LTIM in large caps. Among midcaps, we prefer BSOFT, FSOL, MPHL, CYL, and Zomato.

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