IT companies gears up for Q3 results with tier 1 companies to report modest revenue growth: Report

As the quarterly results season begins next week, the Indian IT services sector is preparing for a mixed performance in the third quarter of FY25, a period traditionally considered weak due to seasonal furloughs, according to a report by Centrum.

The report highlighted that Tier 1 IT companies like TCS, Infosys, and HCL Tech are expected to post modest growth in Q3. On the other hand, Tier 2 firms such as Coforge are likely to show stronger sequential revenue growth, driven by effective operational execution. While the broader sector continues to recover from a downturn, variations in performance are expected across individual firms.

It said, "Revenue growth is expected to be (0.8) per cent to 3.3 per cent QoQ in USD terms for Tier 1 IT companies, TCS: (0.8) per cent; Infosys: 0.0 per cent; HCL Tech: 3.3 per cent, Wipro: (1.5) per cent; Tech M: (0.4) per cent. Tier 2 IT companies in our coverage are expected to report revenue growth of 0.1 per cent to 3.8 per cent QoQ in USD terms, HCL Tech (among Tier 1) and Coforge(among Tier 2) are expected to report highest sequential revenue growth"

The report stated that the operating margins across both Tier 1 and Tier 2 companies are projected to improve slightly. However, some firms may face challenges such as wage hikes and evolving client demands. Insights from management on demand trends, revenue guidance, and hiring strategies will play a crucial role in understanding the trajectory of the industry.

"IT companies remain focused on driving operating margin improvement through multiple levers such as lower subcontracting cost, improving employee pyramid and rationalization of wage hikes" the report said.

The report also noted that the demand environment for IT services in India is gradually improving. Key verticals such as Banking, Financial Services, and Insurance (BFSI), along with Technology, Media, and Telecom (TMT), are showing early signs of recovery.

Meanwhile, the Manufacturing and Healthcare sectors continue to demonstrate resilience, contributing to the sector's steady growth.

A positive trend is anticipated in the conversion of Total Contract Value (TCV) to revenue, supported by a ramp-up of new deals and reduced deal slippages compared to FY24.

Additionally, IT firms are focusing on improving utilization rates, enhancing productivity, and stabilizing employee attrition rates. The sector is also benefiting from a more balanced offshore revenue mix following the disruptions caused by the pandemic.

The report emphasized that burgeoning opportunities in generative AI solutions and a strong focus on operational excellence are likely to sustain the gradual upward trajectory in the IT services sector as it navigates a recovering market.

It said "we expect that Generative AI based deals would be significant driver of incremental business growth in medium term".