IT, Internet, Software, KPO Q2 Preview - Positive Seasonality, Rupee Depreciation To Expand OPM: Dolat Capital

Dolat Capital Report

For Q2 FY25, we anticipate revenue growth of +0.6% to +2.5% QoQ in constant currency terms amongst tier-I IT companies and +2.3% to +4.5% CC growth for tier-II companies, primarily driven strong seasonality in the quarter. Ebit margin is expected to expand sequentially for most IT companies (barring Coforge/HCLTech/Kpit Technologies with wage hikes) due to operating efficiencies and rupee depreciation.

OPM is expected to see QoQ movement of -160 bps to +90 bps in Q2 FY25E.

Our interactions with industry participants indicate banking, financial services and insurance vertical is seeing an uptick and driving the growth momentum. It is important to highlight that most IT services firms are witnessing an increase in headcount, although this growth is not substantial.

In Q1 FY25, lead indicators such as TCV growth, employee additions, BFSI growth suggested slower recovery. Nevertheless, we will carefully watch-out for any uptick in key lead indicators in Q2 such as-

1. Headcount additions (Naukri IT Services Sep-24 Job speak index up 6% QoQ),

2. Furloughs and Client budgeting impact for Q3 and

3. Commentary on recovery in discretionary spend.

At present, we maintain a ‘Neutral’ stance and prefer large caps given lower risk to estimates/valuations.

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