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Emkay Global Financial Services has released a note on the earning expectations for the Indian IT companies for Q2FY25. As per the research IT companies’ revenue growth is likely to reflect the steady demand environment and usual seasonal strength, although discretionary spending is yet to recover. Emkay Global expects YoY growth trajectory to improve further on the back of a stable demand environment, benefits of large deal ramp ups, and no further deterioration in discretionary spending.

The research note further states that the delay in decision-making due to macro uncertainties continue to restrict meaningful pick-up in the growth momentum. Margin performance is likely to remain stable to sequential improvement, except for companies where wage hike is implemented. Commentary on recovery in demand will be keenly watched to gain confidence on sustainable improvement in YoY revenue growth trajectory. The number of deal announcements have increased on sequential basis which indicates some improvement in the pace of deal closures.

Emkay Global believes the uptick in technology spending in CY25 hinges on confidence on macro stability and resilience of the economy after start of the interest rate-cut cycle; some clarity on it is expected earliest in early-CY25. Nifty IT index has outperformed the broader markets by ~9% in the last 3 months on the back of anticipated recovery in demand; however, it underperformed in the last 1 month by ~4% as its premium to broader market leaves limited scope for outperformance in the absence of a real uptick in demand. Their pecking order is Infosys, HCLTech, Tech Mahindra, TCS, Wipro, and LTIMindtree in large caps. Among mid-caps, the preferencee Clerx Services, Cyient,Birlasoft, FirstsourceSolutions, and Zomato.

YoY revenue growth to improve as demand environment remains fairly stable

The revenue growth is expected to improve on YoY basisfor the companies under EmkayGlobal’scoverage on the back of a steady demand environment, benefits from large deal ramp ups, and some recovery in the BFSI vertical. Emkay Global expects select mid-cap companies to outgrow large caps. For Tier-1 companies, the estimated revenue growth of 0.9-3% QoQ, whereas 

mid-caps are expected to grow 2.1-4.5% (Coforge reported numbers would be higher due to integration of Cigniti). Among verticals, the companies highlighted green shoots in BFSI (particularly in North America) in Q1FY25, and the trend continued in Q2 as well. Retail and Hi-tech are seeing some softness, while healthcare and manufacturing are expected to remain relatively resilient. The underlying demand in Communications remains weak. Deal wins are expected to remain steady this quarter.

Emkay Global expectsInfosys to raise its revenue growth guidance to 3.5-4.5% CC YoY (current 3-4%) for FY25, while retaining EBITM guidance of 20-22%. HCL Tech is expected to retain its revenue growth guidance of 3- 5% and EBITM guidance of 18-19%. Wipro is expected to guide for -1% to +1% growth in Q3FY25.

Margin trajectory to improve sequentially

Margin performance is likely to improve sequentially, except for a few companies implementing wage hike in Q2. Absence of visa costs and cost-optimization measures would support margin, whereas ramp up of large deals should partly negate it. For Tier-1 companies, margins are expected to remain flattish to 110bps expansion on sequential basis, while the same for Tier-2 companies should be in the wider range of -180 to 260bps QoQ, due to wage hike and M&As. Attrition should remain steady. Hiring is likely to see some uptick due to fresher intake, while lateral hiring trends should remain muted.

Key monitorables

i) FY25 revenue/margin guidance changes, ii) Management commentary on – demand trends across geographies, confidence on H2 growth uptick, furlough requests by clients, recovery in discretionary spending, and signs of optimism in client conversation after recent interest rate-cut in the US, iii) pace of decision-making, iv) demand trend in key verticals of BFSI, Retail, Manufacturing, Communications, and Hi-Tech, v) deal intake and pipeline, vi) attrition and hiring trends, vii) progress on Gen AI, and viii) pricing environment.

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