Cautious Optimism as Indian IT Sector Faces Growth Expectations

The Indian IT sector anticipates moderate revenue growth in Q2 FY25, according to Motilal Oswal. Analysts foresee gradual improvements in client spending, with growth in specific areas like U.S. banking. Despite optimistic projections, recovery might be slow, with expected year-on-year revenue, EBIT, and PAT growth all just above 5%.

According to a report by Motilal Oswal, India's IT sector is poised for modest revenue growth in the second quarter of the 2025 fiscal year. However, this growth might not fully meet the high expectations of the market. Sector analysts predict a steady improvement in client spending patterns, focusing growth in targeted segments such as U.S. banking.

Nevertheless, while the healthcare and manufacturing sectors are anticipated to fuel expansion, the results might fall short for stakeholders hoping for a robust rebound. Despite an optimistic outlook for the industry, any marked recovery is expected to be gradual. The sector is forecasted to achieve aggregate revenue, earnings before interest and taxes (EBIT), and profit after tax (PAT) growth of 5.1%, 5.0%, and 5.3%, respectively, year-on-year for the companies analyzed.

Major players, including Infosys, Tata Consultancy Services (TCS), and HCL Technologies, are predicted to see revenue upticks of 5.5%, 5.9%, and 4.9%, respectively, for FY25. Meanwhile, mid-tier firms, especially those with strong data engineering and ERP modernization services, are expected to perform better, sustaining their growth trajectory over the medium term.

In the Tier-I category, sequential revenue growth is projected to range from flat to 3% in constant currency terms, with Infosys expected to lead. TCS is anticipated to report a 1% growth in CC terms, while HCLT's growth is expected to remain roughly flat at 1% quarter-on-quarter. Among mid-tier players, Persistent Systems is likely to experience the highest QoQ growth at 4.5%, driven by the ongoing momentum in its healthcare segment, followed closely by Coforge at 4.0%.

The sector's margins are expected to stay within a specific range, with TCS potentially seeing a 20 basis point drop due to its BSNL contract ramp-up and talent costs. Infosys might encounter an 80 basis point decrease in margins. HCLT's margins may rise slightly, though wage increases in the second half of FY25 could pose challenges. For mid-tier companies like Coforge and PSYS, margin performance might be varied, as wage hikes impact Coforge by 100 basis points, partially offset by optimization measures benefiting PSYS.

Infosys is projected to align its guidance with consensus forecasts, suggesting no immediate risk of widespread downgrades within the sector. Favorable cross-currency movements are expected to offer a 30-60 basis point advantage to most companies. In the mid-tier segment, PSYS and Coforge are poised to stand out due to their robust positioning in high-growth sectors such as BFSI and healthcare.

(With inputs from agencies.)