Turning point for IT: Green shoots in Q1 hint at recovery in FY25

Margin performance was a mixed bag in the June quarter for IT companies.

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Analysts across brokerage firms are expecting a recovery in the Indian IT sector in the latter half of FY25 as demand and performance stabilise across the board with the first quarter of the current fiscal providing the much-needed turning point for the segment.

"Most IT companies have shown improved performance in Q1FY25, indicating a revision in demand and stabilisation of uncertainties in major global economies," stated Axis Securities in a report.

This sentiment echoed across the industry with deal wins and the adoption of emerging technologies like AI and IoT driving the sector's rebound.

Despite subdued discretionary spending, especially in segments like telecommunications and hi-tech, analysts have a positive outlook on the sector. Further, analysts are optimistic about the strength of the pipeline even as the outlook for immediate growth remains tempered.

Ajit Mishra, Senior Vice President of Research at Religare Broking had told Moneycontrol that while short-term volatility may persist, the IT sector is expected to maintain a positive tone.

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Mishra believes that US election results and the resolution of recession concerns would bring clarity on demand in the BFSI sector and other IT services. The BFSI segment saw modest growth in Q1 FY25, with expectations for further improvement as FY25 progresses.

In line with this, JM Financial said, "BFSI revenues and professional services grew in 2QCY24," signalling the end of a deceleration phase that had weighed heavily on IT services.

Mixed Margins

Margin performance was a mixed bag in the June quarter. For instance, while Wipro managed to expand margins through strong execution, Tech Mahindra's margins remained in recovery mode.

Although pressure from wage hikes and rising onsite costs was evident, the easing of supply-side constraints offered hope for improvement. "The attrition rate has declined, reflecting some easing in supply-side constraints, which is expected to support improved operating margins for IT service companies," stated the Axis Securities report.

Technical Signals Point to Strength

Kushal Gandhi, Technical Analyst at StoxBox, also maintained a positive outlook for the IT sector, recommending investors to hold their positions. He pointed out that the IT sector showed resilience despite a 33 percent correction following a 250 percent surge from Covid-19 lows. According to Gandhi, the recent breakout signals the start of a stage two uptrend.

Also Read | Nifty Pharma climbs to all-time high; rises 10% in past one month

Eyes on Jackson Hole Symposium

Investors are eyeing the upcoming Jackson Hole symposium this week, where Fed Chair Jerome Powell is expected to hint at the possibility of a rate cut in September. In a research report, Nuvama mentioned that a potential Fed rate cut in September could lead to more positive management commentaries.

Rishubh Vasa, Research Analyst at Indsec Securities and Finance, was cautiously optimistic about the sector. He told Moneycontrol, "A potential Fed rate cut could boost discretionary spending and deal flow for IT companies."

Indian IT companies generate the majority of their revenues from outsourcing deals with US companies. Once macroeconomic conditions improve, the sector is well-positioned for a strong V-shaped recovery, as per the Axis Securities report.

On August 21, the Nifty IT index ended its seven-day winning streak. The IT index dropped 0.4 percent, weighed down by declines in TCS, Tech Mahindra, and HCL Tech, which fell between 0.4 to 1 percent. Tech Mahindra was the hardest hit among the IT stocks after CLSA downgraded the stock to 'hold' due to concerns over stretched valuations.

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