Has IT Sector Bottomed Out?

EARLIER IN JULY, India’s largest IT services company, Tata Consultancy Services (TCS), reported a 4.4% YoY growth in constant currency terms in Q1FY25. However, in its largest geography, North America, and its largest vertical, BFSI, revenues declined 1.1% and 0.9%, respectively. The company said customers were making decisions at a short notice based on macroeconomic conditions. However, K. Krithivasan, CEO and MD, was hesitant when asked if the sector had bottomed out. “It is a scenario of more wait and watch.” The company said customer sentiment had still not materially changed in last three months. “Cost optimisation projects get priority over new discretionary projects if they (clients) are not able to see a short-term RoI,” it said.

Rival Infosys surprised the market with an upward revision in annual revenue guidance from 1-3% to 3-4%. Total contract value was $4.1 billion in Q1 with 58% net new deal component. Salil Parekh, CEO and MD, said clients saw the company favourably for cost take-out (eliminating unnecessary expenses), efficiency improvement and consolidation deals. “Discretionary remains similar to where we were when we started the year, still in a difficult situation,” Parekh said in a call with analysts. Nomura raised the FY25-26 EPS forecast by 2-3% to factor in higher revenues and margins. “Improving growth outlook should drive higher target multiples,” said its July 18 report.

HCL Technologies saw a 5.6% YoY rise in revenue in constant currency terms and bagged $1.96 billion in net new deals during the quarter. C. Vijayakumar, CEO and MD, was vocal about the company assuming a muted discretionary target, similar to last year, and maintained the environment has not changed in any meaningful way during the first quarter to project any optimism. “Even now, there is some discretionary spending, but customers becoming a little bit liberal and open-minded in doing new work is largely driven by economic pressures, whether it is interest rates or inflation,” he said. The company retained guidance of 3-5% growth set at the beginning of the fiscal.

Wipro had a more subdued outlook on discretionary spends. “We see clients still cautious. Discretionary spend is low,” it said. Srini Pallia, who completed his first full quarter as CEO, said clients are still cautious and discretionary spend is low. However, the BFSI sector is where one can still see some of this coming back, he added. In fact, Capco, Wipro’s $1.4 billion acquisition consulting arm which relies quite a bit on discretionary spending for revenues, has been seeing good traction in both U.S. and Europe markets.

However, analysts are bullish on the sector and say growth will bottom out in FY25F and improve FY26 onwards. “Proprietary database shows signs of stabilisation in revenue growth outlook for global 2000 companies, particularly in the BFSI vertical. While a strong recovery in discretionary demand may take a few quarters, it is unlikely to worsen further, in our view,” Nomura analysts wrote in their IT services sector research report. They expect large-cap IT services firms’ growth to rise from ~3% in FY25F to ~7.7% in FY26F. Axis Securities, in its July 8 report, pointed out that non-discretionary spending is expected to see some improvement and believes the sluggish growth trend is bottoming out with no further decline in demand anticipated. “This is paving the way for a strong recovery in the near term. H2FY25 is likely to witness better engagement and higher growth momentum compared to H1FY25.”