IT Q1 Earnings Preview: 5 Factors To Track

The first quarter earnings season is upon us. As always it would be the information technology (IT) companies that will declare their report card first.

India's premier IT company, TCS, will kick things off on July 11th, followed by HCL Technologies on July 12th. Next week, we'll hear from other giants like Wipro, Infosys, and LTIMindtree.

In recent quarters, IT companies have faced muted growth due to high interest rates, causing clients in the US and Europe to cut back on discretionary spending. This has impacted revenues and led to reductions in headcount.

But analysts are optimistic that the first quarter of FY25 will show signs of recovery.

Let's dive into the five key factors to watch in this earnings season:

First, revenue growth.

After a so-called washout FY24, analysts tracking the IT sector are seeing green shoots of recovery in verticals across various sectors including AI, consulting, engineering, healthcare, and BFSI.

However, this recovery or initial signs of it, may likely favour midcap IT firms like Persistent Systems and Happiest Minds.

As for the largecaps, the predictions vary widely with the possibility of negative growth. The upper end of the sequentially constant currency revenue growth forecast ranges from 0.6% to 5%.

Another factor that has been a pain point for the IT sector is the cut down on discretionary spending.

it would be not only be prudent but critical to track commentary revolving around discretionary spending.

And while the worst may be behind on that front, clients may still remain cautious on tech spending, and recovery in discretionary demand may take a few quarters.

Interestingly, AI remains a bright spot with continued customer interest and investment. According to an ICICI Securities report, Wipro clearly stands out in terms of AI-led activities.

Speaking on AI... initiatives surrounding Generative AI which has become an important driver for IT firms, will also be keenly watched.

The deal pipeline for Gen AI has expanded significantly, with TCS, Infosys, and Wipro reporting robust demand.

Sectors like BFSI, healthcare, and retail are keen on integrating Gen AI services.

So far, only Accenture and TCS have reported revenue from this technology, and the market is eager to see if others follow suit.

Fourth, deal wins.

Q1 is traditionally strong for deal wins, and this trend is expected to continue.

However, without a turnaround in discretionary demand, it could still be one of the weakest first quarters in a decade.

Nonetheless, vertical sectors like BFSI and communications might see growth due to recent deal wins, but the hi-tech sector could face challenges as software spending moderates.

Finally, hiring trends.

Amidst gradual demand recovery and persistent economic uncertainties, IT firms are adopting a cautious approach to hiring.

Instead of expanding their workforce aggressively, companies are focusing on filling essential roles and critical skill gaps.

In the fourth quarter of the previous fiscal, the top five Indian IT companies reported a reduction of almost 70,000 employees.

The emphasis is on lateral hiring, especially in areas like AI, cloud computing, and cybersecurity, reflecting the need for experienced professionals.

..............................................................................................

It's the English news brand that understands and fits perfectly into the digital-first lifestyles of our English news audiences.