Indian IT to see a March rerun as tepid demand, pay hikes will hit Q1 earnings

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26 Aug, 2025 12:21

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Weak demand resulting out of recession fears in the US and the recent wage hikes are expected to pressure first-quarter earnings of Indian information technology companies, analysts tracking the IT sector have observed.

In their first quarter preview for the sector, brokerages noted that the orders from the banking and financial services sector, which contributes nearly 30 percent to the IT companies' earnings, are yet to rebound. In addition to the prevaling scenario, declining consumer spending and weak demand from the North American region have only made things tougher for tech companies.

Like was the trend during the March quarter, analysts again see Tier 2 IT companies faring better than Tier 1 players.

Tier-1 vs Tier-2

According to Motilal Oswal, Tier-2 IT companies are expected to outperform their bigger peers by registering a 2.8 percent quarter-on-quarter (QoQ) revenue growth compared to Tier-1 companies, which are expected grow merely by 0.2 percent.

Among Tier-2 IT companies, L&T Technology Services (LTTS) is expected to register an impressive growth of 12.2 percent QoQ on account of its recent acquisition of Smart World and Communications (SWC), its sister business from L&T. Apart from LTTS, Persistent Systems and Coforge are expected to grow by 3.3 percent and 3.2 percent QoQ .

Among the Tier-1 majors, revenue figures for Tata Consultancy Services (TCS) are expected to be flat due to weak discretionary spending and wage hikes.

Most analysts also see Tech Mahindra and Wipro seeing a decline in revenues. Kotak Institutional Equities sees a sharp QoQ decline in Tech Mahindra revenues to 1.8 percent owing to a sluggish deal pipeline for its communications vertical, while Wipro IT is expected to slide to 1.9 percent.

In terms of the PAT (profit after taxes) too, the bottomline figures for Tier-1 IT majors are expected to decline by 2.3 percent QoQ contrary to the expectations for Tier-2 which is expected to see an aggregate rise of 6.8 percent QoQ, Motilal Oswal noted.

Margin pressure

A weak topline and wage hikes are expected to hurt the profit margins of IT companies. Foreign broking firm Jefferies in its preview for the sector observed, “Barring LTI Mindtree (LTIM), all companies should witness flat to declining margins in Q1FY24.” Coforge, TCS and Tech Mahindra will see highest margin contraction on account of wage hikes, it further noted.

According to Motilal Oswal, while services and consultancy giant TCS is expected to see a 140 basis points margin decline QoQ, LTIM on the other hand is expected to expand its margin by 30 basis points.

Also read Morgan Stanley downgrades Cyient, sees higher risk for Tech M, TCS, Mphasis

Bias for Tier-1

Although Tier-2 IT companies are expected to fare better, many brokerages prefer to place their bets on Tier-1 companies. Analysts point out that although the revenue numbers may disappoint, profit margins of these companies are expected to be better than those of Tier-2 companies.

EBITDA (earnings before interest, taxes, depreciation and amortisation) or operating profit for Tier-1 IT is expected to improve from 17.3 percent in Q4FY23 to 17.5 percent in Q1FY24. On the other hand, the Tier-2 IT margins are expected to slide to 14.9 percent in Q1FY24 as against 15.3 percent in Q1FY23.

Kotak Institutional Equities has placed Infosys and HCL Technologies (HCL Tech) at the top among its preferences. The domestic brokerage firm expects HCL Tech to retain its revenue growth guidance of 6-8 percent and 18-19 percent EBIT margin guidance for FY2024.

Motilal Oswal has recommended TCS as its top pick, considering a strong order book and expects the company to benefit in the long term. Analysts expect TCS to register strong TCV (total contract value) numbers, backed by the recent BSNL 5G deal win worth $1.83 billion and UK NEST deal worth $1 billion.

Long-drawn recovery

The market is divided on how soon the IT sector will recover. While analysts at BNP Paribas think it could be as soon as the second half of this fiscal, Motilal Oswal expects the recovery to be more gradual and to be complete only in FY25.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.