IT Q2 FY25 earnings: 5 factors to watch out for

Kotak Institutional Equities said it would monitor Infosys' revenue composition of third-party items in Q1. The brokerage said that one of the factors contributing to the improved performance of India's second-largest IT company in Q2 could be higher revenues from the sale of third-party software.

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

Revenue growth

In Q2FY25, Indian IT companies are expected to show moderate revenue growth, with Tier-I companies projected to post sequential constant currency (CC) growth in the range of 1-3.5 per cent. The street would be looking forward to commentary on how management sees performance for the rest of the year based on client conversations.

A shot in the arm of IT companies without much ado is the depreciating U.S. dollar, as brokerages expect this is likely to result in reported dollar-revenue growth being about 20-100 basis points (bps) higher than CC growth.

While the banking, financial services, and insurance (BFSI) segment in the American market has shown recovery, tepid demand continues in the eurozone, weighing on the overall revenue growth.

Nonetheless, overall revenue growth is expected to remain steady as a result of sustained deal momentum and improving client sentiment, which might set a positive tone for the rest of FY25.

Meanwhile, Infosys might lead the large-cap pack with expected growth between 3 and 3.5 per cent, driven by a combination of large deal ramp-ups and contributions from acquisitions such as the recently concluded “InTech” deal.

TCS will benefit from the incremental revenue from the BSNL deal and cross-currency tailwinds, while HCLTech's revenue growth will be on the back of its IT services and engineering segments.

For Tech Mahindra, the expectation is lower, with revenue growth projected to be flat, which is a reflection of its continued challenges in the communications vertical. Wipro is also expected to see limited growth, with only 0.5 per cent revenue growth, which is at the mid-point of its guidance for Q2.

Discretionary spending

The elusive discretionary spending by clients has remained a sore point for IT companies for the past several quarters. Clients are mostly continuing to prioritise efficiency and cost-saving projects over high-value, transformation deals.

Kotak Institutional Equities' pre-earnings report highlights discretionary spending is yet to recover fully even in July-September, reflecting client hesitancy in the face of global economic uncertainties.

In its recently concluded fourth quarter, the world’s largest IT company, Accenture highlighted that the demand environment is more or less the same, with the tilt being more on the cautious side. “We'll really see in January and February but there hasn't been much of a change. The macro is kind of the same,” said Julie Sweet, CEO, Accenture, last week while speaking to analysts after declaring the results.

Accenture operates on the same turf as Indian IT companies, which gives a broad sense of what the ground situation is.

Also read: What Accenture’s Q4 performance signals for Indian IT companies

Notwithstanding the cautious demand environment, there are some positive signals of recovery in specific sectors, particularly in the banking and healthcare sector, where discretionary spending could see an uptick in the latter half of FY25, according to brokerage Nuvama.

Additionally, the recent interest rate cuts by the U.S. Federal Reserve could lead to an increase in client budgets for IT services in the coming quarters, though the impact may not be immediate.

High interest rates in the US are highly susceptible to IT budgets as clients prioritise cost-saving deals and become cautious on discretionary spending. This is a major issue as to why discretionary spending is being put on hold by IT companies lately.

Outlook for H2FY25

Analysts are not crystal ball-gazing yet on how macro would shape up in the second half of FY25. IT companies haven't commented so far on the impact of the Fed's recent interest rate cut on the demand environment or the ongoing conversations with the customers.

To that extent, while the street appears bullish on a stable and gradual improvement in Q2 results, the uncertainty of how CY2025 and H2FY25 will pan out continues to loom.
“We believe an uptick in technology spending in CY25 hinges on confidence on macro stability and resilience of the economy after the start of the interest rate-cut cycle; some clarity on it is expected earliest in early-CY25,” analysts at Emkay said in their report.

Analysts at JM Financials remained cautious of the current environment. They said that IT services demand is yet to turn around. While there have been sustained pockets of strength in US.

BFSI has not expanded to adjacent areas so far. Ramp-downs, especially in UK/EU, haven’t ceased completely. Customers are still focussed on efficiency, cost take-out deals, a sentiment echoed by Sweet during Accenture’s recent earnings as well.

In short, the sector needs more visible tailwinds to shift the sentiments. Though the silver linings like the rate cut have surely moved the needle a bit on the stock markets for the key players in India.

Gen AI is the opportunity
Perhaps the technology industry is undergoing an awakening of sorts with the generative AI opportunity amidst the uncertain macro conditions. Customers have continued to invest heavily into Gen AI experimentation and developing use cases while cutting back on tech spends in other areas.

So far, only two IT services giants, Accenture and TCS, have disclosed their Gen AI pipeline and expected revenue from it.

Accenture ended FY24 with Gen AI order inflows of $3 billion and $900 million in revenue. This is a significant jump from $300 million in order inflows and $100 million in Gen AI revenues seen in FY23. New Gen AI bookings for Q4 came in at $1 billion.

TCS had last reported that it had doubled its AI and Gen AI pipeline to $1.5 billion and is executing about 270 AI projects across TCS.

In her commentary last month, Sweet said, “We believe the introduction of GenAI signifies a transformative era that is set to drive growth for us and our clients over the next decade, much like digital technology has in the last decade, and continues to do so.”

Girish Pai, head of institutional research at Bank of Baroda Capital, noted in his report that while there is not much change in what the clients are spending on IT, the trend of saving money on IT to free up spending in Gen AI has continued.

All eyes will be on the IT services players’ commentary on Gen AI pipeline this Q2.

Wage hikes and fresh hirings

Brokerages say most Tier-I IT companies have deferred salary revisions to maintain margin stability in the face of slower revenue growth. Companies like Infosys, HCLTech, and LTIMindtree have delayed wage increases until Q3FY25, allowing them to guard operating margins amid weak discretionary spending and subdued client demand.

For example, HCLTech is expected to report a 70 bps margin expansion, largely due to the absence of wage hikes in the quarter, according to brokerage Nuvama.

Also read: Infosys, HCLTech, & LTIMindtree shift wage hikes to Q3 

However, experts argue that companies will need to implement salary increases in Q3FY25 to avoid attrition, especially as demand is expected to pick up in the latter half of the fiscal year.

Pre-earnings research notes from JM Financial and Philip Capital suggest that most IT firms are maintaining a conservative hiring stance, preferring to use internal efficiencies rather than expand headcount in Q2.

Nonetheless, fresh hiring could resume at a higher pace, particularly for roles in high-demand areas like AI, cloud, and cybersecurity. A Moneycontrol analysis of the announcements made by India’s top IT companies in Q1 for FY25 shows they are back on campuses to scout for fresh engineering graduates, after a year-long lull in fresh hiring amid a slowing demand environment.

Between 81,000 and 88,000 new roles will be up for grabs in the current financial year across these five top IT players.