IT Q3FY25 earnings: From wage hike delays to discretionary spend, five factors to watch

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The Indian information technology (IT) sector is gearing up to announce its third-quarter financial results, with the country’s largest software exporter, Tata Consultancy Services (TCS), kicking off the earnings season on January 9.

The Street will watch out for adverse impact of seasonal weakness due to furloughs and macroeconomic uncertainties. Along with Tier-I IT firms like TCS, Infosys, and HCLTech, mid-cap players such as Coforge and Persistent Systems will also be closely watched for cues on how the sector will perform in the medium term.

Analysts predict a mixed bag for the sector, with moderate revenue growth offset by challenges such as weak discretionary spending and margin pressures due to wage hikes. However, signs of recovery in client sentiment and robust deal pipelines in specific verticals like banking, financial services, and insurance (BFSI) provide some optimism for the upcoming results.

Key themes to watch this quarter include the trajectory of revenue growth, the status of discretionary spending, and the broader outlook on client budgets as companies prepare for the calendar year 2025.

Here are the five themes to watch out for in the management commentaries.

Revenue growth

Revenue growth for the quarter is expected to bake in the dual impact of seasonal furloughs and cautious client spending. Analysts estimate sequential constant currency (CC) growth for Tier-I companies to range from nil to 5.5 percent, with India’s third-largest IT company, HCLTech, likely leading the pack due to a seasonal boost in software sales.

“We expect Q3FY25 to be a modest quarter along seasonal trends (holidays, furloughs). But the furlough impact is expected to be similar or lower than last year for most companies, leading to decent QoQ growth,” brokerage Nuvama Institutional Equities said in a research note.

Mid-cap players such as Coforge and Persistent Systems are also expected to show robust growth, driven by large deal ramp-ups and strong performance in specific verticals like healthcare.

However, the overall growth will be subdued as discretionary spending has not fully recovered. Key headwinds include weak demand from European markets, subdued performance in the manufacturing vertical, and currency fluctuations that could impact USD-reported revenues.

For instance, TCS is expected to report flat CC growth as its BSNL deal transitions into a headwind, while Infosys may post modest growth, primarily driven by contributions from third-party revenues.

Despite these challenges, a few green shoots are visible.

The BFSI sector continues to show resilience, particularly in the US market, while improving client sentiment and sustained deal momentum could help offset some of the quarter's challenges.

Analysts will be closely watching out for management commentaries on growth drivers for the last quarter and client budget expectations for FY26.

Discretionary spending

Discretionary spending remains a sore point for IT companies, with clients continuing to prioritise cost-saving projects over large-scale transformation initiatives, say brokerages.

According to a pre-earnings note by brokerage Motilal Oswal Financial Services (MOFSL) citing recent quarterly performance from the world’s largest IT company Accenture, spending in this area has yet to see a full-fledged recovery, reflecting ongoing caution in the face of global economic uncertainties.

“Client spending sentiment is showing positive trends, indicating a potential revival in modernisation and discretionary spending, albeit in some pockets,” the brokerage said.

Vertical-wise, the outlook for discretionary spending is uneven. The BFSI and healthcare sectors are showing early signs of recovery, with some uptick expected in the latter half of FY25. However, demand in segments like manufacturing and high-tech remains muted. For instance, furloughs and budget reallocations in Europe have led to delays in high-value projects, further dampening discretionary spending.

On the other hand, the US Federal Reserve’s recent interest rate cuts may create room for higher IT budgets in the coming quarters, although the impact may not materialise immediately.

Analysts will be keeping a close eye on management commentaries to gauge the trajectory of discretionary spending, particularly as companies finalise their budgets for CY25. Any sustained recovery in this segment could significantly boost revenues and margin expansion for the sector.

Margin recovery

Indian IT companies are right now in the midst of opportune time to quickly improve their operating margins with the US economy improving faster than expected and the rupee weakening against the US dollar. Geographies like North America contribute over 50-65 percent of the total revenue for the sector.

In turn, an improved US economy would also mean tech spending will restart for corporations. According to industry experts, the direct impact of rupee depreciation on margins would start reflecting better from Q4.

Meanwhile, analysts at MOFSL are bullish on TCS and HCLTech gaining on margins, and a decline for Infosys and LTIMindtree.

“We expect EBIT margins for TCS to improve by 40 bps QoQ, largely due to investment made in talent development and training, operational efficiency and absence of wage hikes. HCLT’s margins may rise around 50 bps due to operating leverage and a strong software quarter, despite a wage hike impact and furloughs,” the MOFSL report said.

The analysts expect Infosys margins to decline by 30 bps owing to furloughs and lower working days, offset by pricing gains, subcontractor cost optimisation, and Project Maximus. LTIMindtree will see a sequential plunge of 210 bps due to wage hikes, partly offset by operational efficiencies. Wipro may see a decline of 40 bps.

Analysts will be watching out for commentary on margin improvements in the upcoming quarters.

Wage hike delays

Operating margins may also see some headwinds coming from delayed wage hikes. With the exception of TCS, which has completed its wage hike cycle earlier, most Tier-I peers including Infosys, HCLTech, LTIMindtree and LTTS have either just started rolling out wage hikes or have pushed it further to Q4.

Moneycontrol had earlier reported that Infosys has already pushed its wage hike cycle to Q4, while HCLTech just started compensation reviews in December. These delays may have a spillover effect in the upcoming quarters.

Salaries are a significant part of the companies' wage bills, and by delaying hikes, they are trying to defend margins amid uncertainty over discretionary spending and a challenging demand environment.

Employee metrics

Artificial Intelligence has now taken centre stage for IT companies. US President-elect Donald Trump has reignited debates around the H-1B visa program, along with his evolving stance over time. While his 2017 "Buy American, Hire American" executive order tightened H-1B rules to protect US jobs, recent comments signal his softened approach as tech leaders push for expanding the program to address the labour shortage in the high-demand field.

Sriram Krishnan's appointment as Senior White House Policy Advisor on Artificial Intelligence has only stirred the debate. A staunch advocate for easing immigration to attract global talent, Krishnan's stance highlights the program's role in fuelling US innovation. Tech leaders like Elon Musk and Vivek Ramaswamy have come in support of Sriram Krishnan's push to ease immigration policies.

The H-1B visa program, which is vital for the tech sector and used widely by Indian IT companies, remains a polarising issue. Management commentaries on the issue will be tracked by analysts.