Infosys may lead Indian IT pack this festive season

Brokerages Axis Capital and Nomura in their notes predicted sequential revenue growth upwards of 4% for Infosys, whereas HDFC Securities projected 3% jump in revenue.

Infosys’s growth in the three months through September 2024 is expected to exceed top dog Tata Consultancy Services Ltd (TCS)’s revenue growth of 1.5-2.4%, according to analysts at the three brokerages.

“Growth (of Infosys) to be supported by ramp-up of deals won earlier and the consolidation of the in-tech acquisition," said Axis Capital analysts Manik Taneja, Saksham Savernya, and Rohit Thorat in a note dated 30 September.

This April, Infosys announced its intent to acquire in-tech, a German automotive research and development (R&D) provider. The company announced the completion of the acquisition in its June quarter earnings. Deal ramp-ups refer to a situation where an IT services company starts to get more revenue from clients with whom deals were signed in the past.

As for TCS, the analysts expect its muted revenue growth to be primarily driven by the $1.83-billion 4G network deployment deal it won May 2023 from state-run telecom operator Bharat Sanchar Nigam Ltd (BSNL).

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This deal bolstered TCS’s India business to 7.5% of its quarterly revenue in the June quarter and is expected to contribute to its India growth this year, analysts note.

At the same time, analysts at the three brokerages expect operating margins of the largest IT services companies to increase in the September quarter aided by cost-optimisation including a lower dependence on sub-contractors, cross-currency fluctuations, and low visa costs. However, they have noted that there is a chance of salary hikes offsetting some of the margin gains.

The other top companies

Meanwhile, Noida-based HCL Technologies Ltd’s September quarter growth is expected to be more modest than TCS. Nomura, HDFC Securities and Axis Capital expect 1.5%, 0.8% and 1.9% revenue growth, respectively, on the back of growth in all its business segments barring financial services.

This growth is expected to offset a slight bump in revenue due to its stake sale in a joint venture with US-based financial services firm, State Street, in April this year.

Bengaluru-based Wipro Ltd is expected to report the slowest growth of India’s top five IT services companies. While Nomura and Axis capital expect Wipro to report sequential revenue growth of 0.8-1.5% aided by growth in financial services and consumer sectors. HDFC Securities expects Wipro to post revenue growth of 0.4%.

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India’s fifth-largest IT services company, Tech Mahindra Ltd, is expected to report a modest number of deal wins but gain from cross-currency fluctuations. Much of its growth is expected from clients in the enterprise and telecom verticals. The three brokerages expect Tech Mahindra to report revenue growth of 1-1.6%.

To be sure, both Wipro and Tech Mahindra have seen changes at the top in recent months. While Srinivas Pallia took over as Wipro chief executive officer in April 2024, Mohit Joshi took charge of Tech Mahindra last December. Both CEOs outlined plans to bring their companies back to growth, either by driving more consulting-led conversations with clients, or by investing in new capabilities.

The full-fiscal picture

For the full fiscal FY25, the performance of India’s largest software services companies is expected to be marginally better than last year when they reported their slowest-ever growth. TCS, Infosys and HCLTech reported revenue growth of 4.1%, 1.9%, and 5.4% for the year ended March 2024, whereas Wipro and Tech Mahindra reported revenue decline of 2.2% and 5%, respectively.

IT industry body Nasscom had estimated the Indian outsourcing industry to grow at its slowest clip of 3.3% last year due to macroeconomic uncertainties and a pull-back of client spending on technology.

“The IT sector growth is in the middle of its recovery, having bottomed out two quarters ago, and is expected to achieve a high single-digit over the next three quarters," said HDFC Securities analysts Apurva Prasad, Amit Chandra, and Vinesh Vala in a note dated 1 October, adding that the companies’ current stock prices reflect increased confidence in this trajectory.

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They added that AI is proving to be a net positive for the sector, and with GCC (global capability centre) growth differential peaking, concerns around terminal growth are easing, supporting sustained demand.

“Despite the absence of mega deals recently, some improvements in decision cycles and discretionary can support growth even as the fabric of cost optimisation remains," the three analysts noted.

TCS is expected to announce its quarterly earnings for the three months through September 2024 on 10 October followed by HCLTech on 14 October. Bengaluru-based IT services companies Infosys and Wipro will announce their quarterly performance on 17 October and Tech Mahindra on 19 October.

Signals from Accenture

Accenture, the world’s largest software services company, announced its full year results last week, reporting $64.9 billion in revenue for the year ended August 2024, which is a yearly growth of 1.2%.

Its CEO Julie Sweet in an interaction with analysts post the results, said the macroeconomic environment was more or less unchanged.

“Obviously there's some events going to come up in the fall that people are thinking about, but there's not like a big tone change, and I think because if you look at the macroeconomic environment, FY25 is going to click down in the US, maybe a little bit better in Europe, but overall not a lot of improvement," said Sweet in the post-earnings call with analysts on 26 September.

And read | Accenture secures GenAI orders worth $2 billion in first nine months of FY24