IT Q1 Results Preview - Expect Status Quo On Demand Commentary: Nirmal Bang

Nirmal Bang Report

After a 410 basis points outperformance by Nifty IT against Nifty in 2023, it has underperformed by 910 bps year-to-date although it has recovered 630bps on MTD basis. Elevated PE multiples of tier-I and tier-II IT players are either a sign that there is an earnings upgrade cycle in the offing for FY25/FY26 and/or that flows into equities are strong.

We think FY25 consensus earnings still likely have a modest downside and a strong pick-up in FY26 is already factored in.

We believe Q1 FY25 will be a decent quarter and with growth QoQ for nine out of 11 coverage companies. The post quarter commentary on demand conditions for FY25 will be the highlight.

We think that it will remain the same as in the previous two quarters. Consensus (including us) is building in a modestly better FY25 versus FY24 on the back of strong order inflow in FY24 and expectation of a spending pick-up in H2 FY25.

After nine months of downward revisions in revenue growth and EPS by consensus, we now expect modest downward revisions in H2 FY25. All players are likely to hold on to their revenue and margin guidance (if publicly put out) as of now. The H2 FY25 rebound hope is at risk due to:

1. U.S. interest rates remaining higher for longer,

2. Expectations of dramatic changes in economic policies post US elections in Nov. 2024 – especially around tariffs if Donald Trump wins.

The announcement on large deal wins by Indian IT players have been relatively muted since September 2023.

We persist with our ‘Underweight’ stance on the IT sector as we believe that we are in a ‘slower for longer’ demand environment and the risk is for current consensus estimates to be cut rather than raised.

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