According to analysts, the US Federal Reserve’s interest rate cut impact may start baking into discretionary spending plans of customers only by Q4. The customers may also await the US election season to reevaluate plans and be more certain.
The top Indian IT services companies saw green shoots on several fronts in the second quarter ended September 30, leaving the Street upbeat on the sector’s turnaround potential in the second half of FY25. These include recovery in the banking, financial services, and insurance (BFSI) sector, an increase in headcount, and steady revenue growth.
To be sure, apart from Wipro, the other top three Indian IT companies including Tata Consultancy Services (TCS), Infosys, and HCLTech reported a lackluster large deal pipeline this quarter.
In terms of year-on-year (YoY) revenue growth in constant currency (CC) terms, HCLTech led the pack. The company also managed to beat market estimates for EBIT margin growth and net profit, driven by well-distributed deal wins across verticals, geographies, and offerings.
Infosys, despite experiencing slower-than-expected growth, surprised investors with a strong increase in its revenue growth guidance for the full year of 2025. The company raised its forecast to 3.75-4.5 percent, up from the 3-4 percent range announced in July, indicating a positive outlook for growth.
“These results are a mixed bag, but are moving in a much more positive direction as the US economy shows very strong signs of heightened growth,” said Phil Fersht, CEO of research firm Horses for Sources. Adding that the US Federal Reserve’s rate cuts, combined with a rapidly improving US economy, are improving the outlook for the financial services sector.
“On top of the rate cuts the positive 4% GDP (Gross Domestic Product) and 4.5% increase in family income, record low unemployment, and highest-ever stock market are driving up confidence,” Fersht told Moneycontrol.
On the revenue guidance front, Infosys is clearly more bullish among TCS and HCLTech.
Pareekh Jain, founder and CEO of industry insights platform, EIIRTrends, agreed. “It’s safe to say that for Q2 the highest growth is still with HCLTech, but momentum is more for Infosys because they have increased the guidance,” Jain added.
He added that while HCLTech is overall the top performer among peers in Q2, the base and scale of TCS and Infosys are very different and much higher.
Total Contact Value (TCV) or deal wins for most Tier-1 companies moderated and were slightly lower than expectations, said Sanjeev Hota, Head of Research, Sharekhan by BNP Paribas.
“Wipro reported the best large deal TCV momentum among the reported Tier-1 companies. On YoY basis PAT growth was strong for all companies. On a sequential basis PAT growth was healthy for LTIMindtree, Wipro, and Infosys; while it was slightly muted for HClTech and TCS,” Hota added.
According to analysts, the US Federal Reserve’s interest rate cut impact may start baking into the discretionary spending plans of customers only by Q4. The customers may also await the US election season to reevaluate plans and be more certain.
But overall, the interest rate cut impact on discretionary spending will be seen across industries, especially in manufacturing and retail, apart from BFSI.
Gaurav Parab, Principal Research Analyst at NelsonHall, said that the results of top India-based services providers did receive a boost from the BFSI sector, which accounts for roughly a third of their revenues. “With inflation slowing in the US, and major banks reporting better than expected numbers – this momentum will be a strong tailwind in the coming quarters,” Parab said.
He added that most companies faced pressure on margins because of ongoing investments, while a couple of companies have client-specific issues and longer sales cycles that are expected to be managed soon.
“The Q2 performance signals return to revenue growth in times to come with the providers individually overcoming their own specific challenges like leadership transitions, slow pace of ramp ups in large accounts and delayed deal closures,” Parab added.
According to Ishan Anand, Principal Analyst at Gartner, with IT companies unanimously betting big on Generative AI demand, the management consulting major had also revised its own IT spending forecast for the second quarter of calendar 2024.
“With Gartner’s revised IT spending forecast for Q2CY24 showing an increase of 1.3% (from 7.6% to 8.9%, reflecting price hikes in servers, devices, and software) and strong deal pipelines of major IT service providers, the overall outlook remains positive and we expect this recovery to continue in the upcoming quarters as well. IT service providers are enhancing their efforts to pursue and secure more large deals,” Anand said.
Analysts and companies agree that the financial services industry will continue to recover its growth. “And those service providers aligned with supporting enterprise’s need to develop their AI capabilities will find new avenues for growth and profitability,” Fersht added.
He also added a word of caution for IT companies saying that those that are simply papering over the cracks of the legacy services model will continue to struggle. “This market is not for the faint-hearted.”
The main nervousness is being caused by the Middle East war and the forthcoming US election, where potential trade tariffs could have a major effect on the US economy, Fersht said.
What companies said?
Despite a weak performance in Q2, Tata Consultancy Services (TCS) anticipates an improvement in Q4 FY25 as Q3 is traditionally a weak quarter marked by furloughs.
“We expect the headwinds to stabilise in Q3 and return to growth in Q4,” the TCS management told analysts in its post-earnings conference call on October 10.
Furloughs involve the situation where clients in areas like the US and Europe refrain from compensating outsourced employees from Indian IT firms for specific days when their operations are suspended, typically during Christmas and New Year.
On being asked about the expansion of deal cycles, the IT behemoth clarified that the time to close the deal has been extended. “It’s not the tenure of the deal, it’s the time to close the deal that has expanded between Q1 and Q2.”
TCS’ nearest rival, Infosys, said it sees discretionary spending in two parts. Firstly, discretionary spend by clients in the financial services sector is positive. However, Infosys has not seen discretionary spending coming back in the other industries.
“We saw the continued weakness on retail, and then we saw a little bit new weakness on that automotive in Europe,” Infosys Chief Executive Officer Salil Parekh told analysts during Q2 conference concall.
However, India’s third-largest IT company HCLTech was the only one to give an optimistic view on discretionary spending. “It was a good, balanced discretionary and non-discretionary growth. So, that gives us some confidence as we get into this quarter,” Vijayakumar said, adding that the company is cognizant of the tepid broader macroeconomic environment.
On the other hand, Wipro agreed with the other two of its peers, saying the company has seen no change in discretionary spending. However, discretionary spending is back in the BFSI segment.
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