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Recent rally leaves little room for IT firms to disappoint

By Devangshu Datta
Last updated on: March 21, 2024 11:04 IST
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Analyst are cautious about the performance of IT services sector from January to March quarter (Q4) of FY24 and the first half (H1) of FY25.


Illustration: Dominic Xavier/

While the Bloomberg consensus on revenue implies the market is expecting 2-3 per cent growth on a quarter-on-quarter (Q-o-Q) basis for the IT majors through FY25, the H1FY25 is likely to see even flatter returns, and Q4FY24 is likely to be poor.

There is likely to be some recovery in the second half (H2FY25) but even so, there’s a chance that the market will be overall disappointed.


One way to look at the industry is by segmenting it into Engineering and R&D (ERD) services versus other services.

The ERD companies have high valuations.

There is demand from aerospace, smart factories (where production processes are being reworked for efficiency and sustainability), and automotives but not from other verticals.

Margins are likely to be range-bound.

The outlook seems especially weak in the key telecom vertical where telcos rolling out 5G services have seen a slowdown in industrial use-cases, which translates into less demand for ERD.

In other services, one key element could be the US Federal Reserve’s attitude – there may be a pick-up as and when the Fed starts to cut interest rates.

However, there could be positive surprises on margins even though revenue growth may not be strong.

Analysts point at better utilisation of the workforce, lower need for subcontracting (hence lower costs), lower average costs of resources, and lower wage hikes and incentives to maintain margins.

Revenue growth, if it happens, would be a positive surprise.

One wild card could be the penetration of Generative AI.

Nobody in the industry seems to be expecting a significant contribution from GenAI in FY25 and if this does occur, it could provide a significant boost.

Optimists will point at the fact that Nvidia (which makes the chips req­uired for GenAI) has reported better results and guidance which may translate into downstream revenues for IT services.

The Nifty IT index has started to outperform the Nifty from around November 2023.

It has delivered 26 per cent return in the past 12 months (Nifty 50 has returned 28 per cent in 12 months) and 11.5 per cent return in the last three months (Nifty has returned 5 per cent).

When examining key players like Tata Consultancy Services (TCS), Infosys, Wipro, HCLTech, Tech Mahindra, and LTIMindtree, the revenue consensus expectations for FY25 vary from 5 per cent (Wipro) to 10.7 per cent (LTIM).

Margins will be held at around FY24 levels. One alarming data point for value-investors: The current averaged Earnings/Price yield (the inverse of PE which is around 26x) for the IT industry is lower than the current (safe) yield on the $10-year bond, a level not seen since 2007.

Expectations for a growth rebound as the Fed eases monetary policy seem to be priced in, leaving little room for disappointment.

Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.

Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

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Devangshu Datta
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