IT Majors Expect Upbeat Q2 Earnings; Surge In BFS Deals a Key Driver

Buoyed by revival in the deals of banking and financial services and uptick in business sentiment across North America, Indian software majors are set to report steady results in the second quarter.

Leading the pack, Infosys and LTI Mindtree are set to be the large players in terms of revenue growth during the September quarter. Meanwhile, Coforge and Persistent Systems are expected to outperform their peers in the mid-tier pack.

Tata Consultancy Services (TCS) will inaugurate the result session on October 10, followed by C Vijaykumar-led HCL Tech on October 14. Infosys and Wipro will report their results on October 17.

ICICI Securities said that the IT sector might see better earnings during this quarter on account of increased momentum of hyper-scale growth and upbeat growth from North America following dampening momentum in healthcare. It added that green shoots in BFS (banking and financial services) and increased momentum in AI deals will lead to uptick in their performance.

Noted brokerage house, Jefferies, said that Infosys is set to clock a revenue growth of 0.8 percentage point following the acquisition of In-Tech. It estimates the IT major’s Quarter on Quarter (QoQ) revenue growth to grow at 2.5%.

In addition to this, the brokerage house expects TCS to report a 1.2% QoQ revenue expansion in constant currency – mainly driven by ramping up its deal with BSNL. Meanwhile, Coforge is set to report QoQ revenue growth at 2.5%, but warned Wipro, HCL Tech and TechM of reporting flattish revenue.

Notably, acquisitions made into engineering and research & development have not reaped much needed benefits for major IT firms who expected strong deal wins from the automotive sector.

“Weaker-than-expected EV (electric vehicle) adoption and a general slowdown in demand has impacted auto OEMs (original equipment manufacturers). Auto OEMs have dialled down R&D spends on electrification initiatives, in response to moderate demand,” Kotak institutional equities’ analysts said in a note. However, investments in programmes related to the automobile sector are on cards, it said.

Notaly, analysts are awaiting for the trend of hiring numbers to understand the demand situation. Kotak Securities said, “Hiring will be a good indicator of confidence on demand since most companies have reached peak utilisation. Growth hereon requires hiring — signs of the same will give comfort on growth forecasts.”

Nomura analysts foresee a poor FY25 as they believe that revenue growth is likely to be bottoming out for the Indian IT companies.

“Onset of the interest rate cutting cycle and a potential thaw in decision-making by US corporates post US elections in November 2024 could provide a fillip to demand, in our view. GenAI adoption is likely to gain steam in the next 12-18 months and could improve demand for cloud services and data standardisation,” Nomura said in a report.

It added, “While the rate-cutting cycle has begun, its impact on demand improvement is likely to be visible earliest in the upcoming budget cycle of clients in Jan/Feb 2025.”

Currently, the market is set to keep an eye on demand commentary in the BFSI, hi-tech and communications verticals while keeping a tap on sustenance of green shoots in North America and impact of furloughs in the third quarter.