The Indian IT sector is expected to deliver modest results at best, in the traditionally strong July-September quarter. As macroeconomic conditions have stayed largely unchanged over the past few months, the sector is seeing cuts in discretionary spending, and delays in deal conversions. 

Despite the gloomy backdrop, Nifty IT outperformed the Nifty 50 by 8.3 percentage points over the past three months. Within the Nifty IT index, Mphasis and Persistent Systems rose the most, gaining 31.5% and 14.5% respectively. In contrast, LTIMindree gained only 0.6% over the same time period. 

Mphasis, Persistent, Infosys and TCS beat the Nifty IT

After an initial dip following the announcement of a weak Q1FY24, IT stocks started to rally. Many investors believed the stocks were trading at attractive valuations, after prices fell. Adding to this uptrend was the strengthening of the US Dollar (USD). Over the past three months the USD gained 0.8% against the Indian Rupee. This comes as the greenback has strengthened against other major currencies, with the US Dollar Index increasing by 4.5% over the same time period. The index measures the USD’s value against a selection of currencies, namely the Euro, Japanese Yen, British Pound, Canadian Dollar, Swiss Franc and Swedish Krona. 

Despite the rise, the street expects growth to be subdued throughout FY24. However, brokerage houses are split over the sector’s potential trajectory in the medium term. 

Brokerages split on IT sector’s recovery

Overall, analyst consensus on the IT sector is largely cautious for FY24. However, opinions on the timeline for recovery diverge, with some brokerage houses expecting a rebound starting in FY25, while others predict FY25 will have similar macroeconomic conditions to FY24. 

HDFC Securities is optimistic about the IT sector and has a positive rating on most IT companies it covers. The brokerage projects revenue growth for the sector to hover around 9% in FY25, along with an improvement in margins. It sees strong growth in deal bookings, fueled by spending towards artificial intelligence, cost optimisation projects, and cloud migration. HDFC has a ‘Buy’ rating on Persistent Systems and LTIMindtree, and an ‘Add’ rating on Tata Consultancy Services (TCS), Infosys, HCL Technologies (HCL Tech), Wipro and Mphasis. Meanwhile, Tech Mahindra gets a ‘Reduce’ rating.

Morgan Stanley also has a similar outlook. It expects healthy revenue and margin growth in FY25. The firm believes that the macroeconomic environment is stabilising, with spending in the Banking, Financial Services and Insurance (BFSI) segment rebounding. 

However, Nirmal Bang holds a more measured view for FY25. According to reports, the brokerage predicts a marginally faster growth rate in FY25 compared to FY24, with underlying risks still intact. It believes that the US economy will go through a shallow recession in 2024, creating hurdles for Indian IT firms. 

As a result, the brokerage has cut its FY25 revenue estimates for most IT stocks under its coverage, holding a ‘Sell’ recommendation on nearly all, except for Tech Mahindra. Nirmal Bang upgraded the rating on the company from ‘Sell’ to ‘Add’ as it expects margin expansion in FY26 under the new management. 

Most analysts remain cautious on the upside potential of IT stocks

According to Trendlyne’s Forecaster, as of October 2023, the consensus recommendation from analysts is not positive. Among the large-cap IT companies, TCS, Infosys and HCL Tech have a ‘Hold’ recommendation, while Wipro has a ‘Sell’.

Similarly, for the mid-tier firms, LTIMindtree and Persistent Systems both have a ‘Hold’ and Tech Mahindra and Mphasis have a ‘Sell’ rating. 

Trendlyne’s Forecaster points to moderate growth in Q2FY24

According to Forecaster Estimates, HCL Technologies is expected to lead in terms of revenue and profit growth QoQ. Wipro is the only IT giant poised for revenue decline. 

Forecaster estimates Wipro’s revenue will fall in Q2FY24

Among the mid-tier firms, Tech Mahindra and Persistent Systems are forecasted to see double-digit profit growth QoQ. However, Tech Mahindra’s expected growth is likely due to a low base, as it missed its net profit estimates by 38.8% in Q1FY24. 

Persistent Systems and Tech Mahindra’s profit expected to surge in Q2FY24

Persistent Systems is projected to outpace its peers in revenue and net profit growth, while LTIMindtree’s bottom line is expected to remain flat. 

IT stocks set for tepid annual revenue growth in FY24

All the IT stocks in focus will likely see painfully slow annual revenue and profit growth rates in FY24, according to Trendlyne’s Forecaster. Each company’s top-line growth rate is projected to lag its five-year compound annual growth rate (CAGR) from FY18-23. 

Reductions in discretionary spending and increased competition for mega deals are putting pressure on margins, leading to suboptimal net profits.  

Among the large caps, Wipro’s annual revenue is expected to be the slowest, while Infosys is estimated to lag in net profit growth. Only TCS is likely to see its annual net profit for FY24 surpass its five-year CAGR. 

IT giants’ revenue growth rate to drastically slow down

Among IT midcaps, Mphasis’ annual revenue is expected to decline marginally by 0.4% YoY, while Tech Mahindra’s annual profit is likely to slump by 8.2% YoY. Persistent Systems is projected to lead again in terms of annual revenue and net profit growth. 

Only Tech Mahindra’s annual profit expected to fall in FY24

Lastly, LTIMindree’s annual revenue and net profit are expected to grow by 9.6% YoY and 12.8% YoY respectively. 

Indian IT is navigating murky waters, awaits clarity on demand revival 

Investors may have to brace for another dull quarter as global uncertainties and inflationary pressures weigh down Indian IT players. The management commentary post Q2 results will be closely watched for any signs of a recovery. Given the recent surge in IT stocks, the absence of positive commentary may reverse the gains. 

The sector’s performance hinges on technology spending picking up in the US and Europe. With volatile geopolitical and macroeconomic conditions, one can only guess when precisely, the Indian IT industry will bounce back.

This analysis by Trendlyne is meant for investor education - to help understand companies and make informed investment decisions on their own. It should not be considered an investment recommendation.