Muted Q1 for IT firms more likely

There is a long way for the US interest rates to come down due to huge deficit seen in the US economy. Unless that comes down, there will be no meaningful recovery - V Balakrishnan, Chairman, Exfinity Ventures & former CFO of Infosys, tells Bizz Buzz

Bengaluru: The first quarter performance of most IT firms is likely to be modest with no significant recovery seen among most players. Brokerage firms and industry experts are of the opinion that no meaningful recovery will be seen in discretionary spend, limiting margin improvement in a big way.

“FY25 is expected to have kick-started with moderate performance in an otherwise strong Q1, attributed to depleting enterprise sentiment and confidence to resume discretionary programmes at the onset of adverse macros. Q1 revenue performance will be biased towards selective verticals or a couple of large deal ramp-ups that have long been deferred, instead of broad-based recovery within the space,” the brokerage firm, Prabhudas Lilladher wrote in a note.

Industry experts noted that unless the interest rate comes down in the US, IT spending is unlikely to recover in the near-term.

“There is a long way for the US interest rates to come down due to huge deficit seen in the US economy. Unless that comes down, there will be no meaningful recovery,” V Balakrishnan, Chairman, Exfinity Ventures &former CFO of Infosys, told Bizz Buzz.

Prabhudas Lilladher research noted that the broader theme of cost-takeout deals would continue to dominate the outsourcing industry with reprioritisation of spend over discretionary programmes.

“However, a few verticals (BFSI, Communications) witnessed some momentum in activities with a slight uptick in discretionary spends, but it is difficult to call this a trend that is sustainable and predictable. Hence, we are not expecting any revision for the full-year guidance for Infosys and HCL Tech,” the research note said.

Among large IT firms, Infosys is likely to outpace its peers in terms of revenue growth rate. The brokerage firm predicts Infosys to post 2.2 per cent rise in revenue (Q-o-Q) as compared to 1.4 per cent rise for Tata Consultancy Services (TCS).

HCL Tech, Wipro and Tech Mahindra are likely to post weak revenue growth figures during the first quarter, the brokerage firm noted.

In terms of operating margin, on an average margin improvement of 20 basis points is likely to be seen among IT players. However, salary increment payout may lead to margin contraction at TCS, while weakness in high-margin business is likely to pull down HCL Tech’s operating margin.

“Deal activities should continue the momentum in Q1 with normalized TCV (total contract value) after the awarding of large deals in Q4 (for a few names),” it noted.

Hiring numbers are again likely to be modest in the first quarter with no meaningful improvement in demand environment. “The current demand slowdown, headroom for further improvement in utilization (on freshers) and moderating attrition are more than compensating the required resource fulfilment,” the note said.