IT firms are poised for a modest recovery during the April-June quarter due to a major deal ramp-up and moderation in discretionary spending cuts. This period is also seen as a seasonally strong quarter.

According to Motilal Oswal, the industry is poised to experience a “seasonally strong quarter-on-quarter sequential improvement” despite a challenging backdrop marked by significant cuts in discretionary spending in previous quarters. The brokerage said in its preview report that the period could signal the end of what it described as a “brutal winter of discretionary spending cuts”.

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For FY25, major players such as HCLTech and Tata Consultancy Services (TCS) are expected to report revenue growth in the range of 5-7% in constant currency terms, recovery in flow business and new discretionary spending by clients. Mid-tier companies, especially those with strong pre-GenAI spending in data engineering, are also expected to do well.

According to Motilal Oswal, while verticals such as banking, financial and communications have faced pressure, recent deal wins should accelerate growth, particularly benefiting companies like Infosys. The firm forecasts -0.5% to +2.0% quarterly revenue growth in constant currency terms for Tier-1 companies and -1.5% to +5.0% for Tier-2 players.

On similar lines, Kotak Institutional Equities predicts moderate improvement in many companies due to seasonal strength and large deal ramp-up. “We forecast a moderate improvement in growth … led by seasonal strength, a large deal ramp-up and easing cuts to discretionary programs,” he said in a report.

Margin outlook and deal wins

Margins are expected to remain largely stable. Analysts cautioned that the balancing act of deferring wage growth against visa costs and recovering lost volumes is likely to result in a slightly negative bias for Q1 FY25. ICICI Securities forecasts an average margin expansion of 19 basis points sequentially for the sector.

Deal activity is also picking up sharply, with a focus on cost recovery projects. JM Financial suggests that deal-winning momentum continued in Q1, although mega-deals are few and far between. “The pace of deal wins likely continued in Q1…however, barring Wipro’s $500 million deal win from a US-based telco, mega deals are missing,” the brokerage firm said in a report.

The impact of generative AI

Nomura points out that the adoption of GenAI is accelerating and is poised to improve demand for cloud services and data standardization. This technological advancement is expected to be a major contributor to the sector moving forward, particularly in enhancing service delivery and operational efficiency.

“Adoption of GenAI is likely to gain steam over the next 12-18 months and could improve demand for cloud services and data standardization,” the brokerage said in a report.

The role of GenAI goes beyond simply adopting technology. It influences strategic decision-making in the IT sector. Companies are increasingly integrating AI into their service offerings, focusing on both cost efficiency and innovative solutions. This shift is expected to create new revenue streams and reshape client relationships, especially in domains that rely heavily on data insights and automation.

Company specific performance and future outlook

Infosys and TCS are poised to lead the pack among large-cap companies. Motilal Oswal forecasts strong growth in the quarter for Infosys, with a 2.0% increase in constant currency terms, while TCS is forecast to grow 1.6%.

In contrast, HCLTech is expected to face challenges, with revenue growth expected to decelerate to 2%, largely due to productivity gain sharing in a key contract. “The 2% reduction in HCLT is already baked in, as guided in the previous quarter,” ICICI Securities said.

Mid-tier IT companies such as Persistent and Coforge are expected to show strong performance, driven by niche capabilities and strategic deal ramp-ups. Persistent expects 5% quarter-over-quarter revenue growth, particularly strong in the healthcare vertical. Coforge, while expected to grow around 1.5% in the quarter, is a strong player due to its diversified portfolio.

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