IT Services Q2 Results Preview - To Stay Soft Despite Seasonality: Systematix

Systematix Research Report

Q2 FY25 could be a mixed bag for IT companies. Deal execution may pick up further in Q2, as this is a seasonally strong quarter for IT companies. The 50 basis points rate cut announced by the U.S. Fed in Sep 2024 has elevated street expectations on strong recovery in the sector.

However, we expect to get clarity on clients’ spending behavior (especially on the discretionary side) after Q3, once they finalize their budgets for CY25 (factoring in the impact of rate cuts and U.S. election results).

Sector-wide, we don’t see any tailwinds so far as the companies across our large cap coverage are expected to clock-in a 0%-3% sequential growth in their USD revenues while the Ebit margins would remain largely range bound with an upward bias due to productivity improvement.

We expect Tata Consultancy Services Ltd. to post sequential revenue growth in Q2, boosted by strong deal execution and BSNL deal ramping up. However, revenue growth may be lower compared to historical Q2 numbers, as weakness in the U.S. and continental European markets could continue in Q2.

We expect Infosys Ltd. to post strong revenue growth on deal wins; it may lead the Q2 revenue growth amongst the top five companies (TCS, Infosys, Wipro, HCLTech and Tech Mahindra.

HCL Tech, Wipro and Tech Mahindra may post flattish sequential USD revenue growth. Sonata Software may post sequential revenue decline on consolidated basis, as Q2 is a seasonally weak quarter for the company.

On the margin front, Infosys may bear the brunt of one-off reversals, while TCS, HCLTech, Wipro, Tech Mahindra, and Sonata Software may see their margins improve sequentially, on superior utilization and cost optimization initiatives. A variance in the quantum or timing of the clients’ reaction on spending to improving macros would be one of the key risk factors.

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