IT Q3 Preview: Midcap IT companies to likely shine; guidance revision in focus

The Indian IT sector is set to commence its December quarter earnings season, with Tata Consultancy Services (TCS) leading the pack on January 9. The December quarter is historically marked by seasonal weakness due to furloughs, and this year is no exception.

Analysts predict subdued growth across the board for large-cap IT companies, barring a few exceptions.

HCLTech is likely to outperform its peers, with an anticipated 4 per cent quarter-on-quarter growth in constant currency terms, driven by its products business.

LTIMindtree may also post modest gains, but other players like Infosys and Wipro are expected to report marginal or flat growth.

Midcap IT shines amid headwinds

Midcap IT companies, however, continue to shine. Persistent Systems and Coforge are expected to post strong quarter-on-quarter growth of four to 5 per cent in constant currency terms. These stocks already delivered stellar returns in 2024, with Persistent Systems up 70 per cent and Coforge up 60 per cent, making them top picks in the midcap IT space.

Guidance revisions in focus

Among Niftyt50 IT Stocks, Infosys and HCLTech are both on the radar for potential guidance upgrades.

Infosys may narrow or increase its full-year revenue guidance while retaining its EBIT margin guidance of 20-22 per cent.

HCLTech could revise its organic revenue growth outlook upwards, though its EBIT margin guidance of 18 -19 per cent is likely to remain steady.

Meanwhile, Wipro’s fourth quarter guidance is projected to range from negative 0.5 per cent to positive 1.5 per cent in constant currency terms.

Key themes to watch

Investors and analysts will closely track:

• Recovery in discretionary spending

• Revival in stressed sectors like telecom and manufacturing

• Hiring trends and talent investments

• Progress in generative AI adoption as a growth driver

• Client budgets and new deal wins

Brokerage insights: Diverging views

Brokerage firms have mixed opinions on the sector. Morgan Stanley notes that investor positioning in IT is now overweight, a shift from the start of 2024. It advises caution, recommending profit-booking in the first quarter of 2025. The firm’s top picks are LTIMindtree, Infosys, and TCS among large-caps, and Coforge in midcaps.

HDFC Securities highlights the importance of operating margin recovery, emphasizing that efficiencies achieved through automation and lower attrition will play a crucial role in maintaining profitability. Additionally, the brokerage underscores a focus on large deal wins, which could steer the growth trajectory for major IT firms.

Sharekhan points out that the demand environment remains a mixed bag, with cautious client spending offset by opportunities in digital transformation projects. It anticipates a more stable quarter for Infosys and HCLTech, with TCS expected to showcase consistent performance in winning large deals and expanding its footprints in key markets. 

Jefferies, on the other hand, strikes a more optimistic tone, citing an improving growth outlook that could sustain premium valuations. It recommends stocks with robust growth visibility such as Infosys, TCS, and LTIMindtree in large-caps, and Coforge, Mphasis, and Sagility in the midcap segment.

Nifty IT: A two-year winning streak

The Nifty IT index has delivered over 20 per cent returns for 2 consecutive years, outperforming the broader Nifty index by 13 per cent in 2024. With management commentary turning constructive, particularly in the BFSI space, the IT sector could continue to attract investor interest despite challenges in earnings growth.

The upcoming earnings season will set the tone for 2025, with market participants keenly watching for signs of sustained recovery and growth drivers in the IT space.