IT Sector Q3 Results Preview - Seasonality To Weigh On Performance; TCS Gets 'Hold' Among Others By Systematix

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Systematix Research Report

Subdued deal executions due to fewer working days and furloughs may render Q3 FY25 into a seasonally weak quarter for IT companies. We expect discretionary spending to remain under pressure in the near-term, as clients continue to prioritize cost optimization and ROI-driven deals, although US Fed’s 100 bps rate cut in 2024 did initially raise hopes of a recovery.

The Fed’s Hawkish stance and reduced rate cut expectations for 2025 reflect strong S&P 500 earnings growth expectations driven by economic recovery, cost efficiencies, and potential tax cuts under a Trump 2.0 administration.

We believe that Indian IT services companies may benefit with a one-quarter lag, though the stance on H-1B visas remains uncertain. For the quarter, we expect large-cap IT companies to report USD revenue growth of -1%-3% sequentially, with Ebit margins largely stable but with potential improvement from productivity gains.

Tata Consultancy Services Ltd. may see a muted quarter, as the ramp-up in BSNL deal is stabilizing and the U.S. and European market demand may continue to weaken.

Infosys Ltd. may report modest growth but deal execution may slow down QoQ due to seasonality. Wipro Ltd. and Tech Mahindra Ltd. are expected to report marginal or flat sequential USD revenue growth, whereas HCLTech Ltd. and Sonata Software Ltd. could report stronger quarters, given the seasonality in their businesses.

On the margin front, most companies, including TCS, HCLTech, Infosys, and Tech Mahindra, could see slight improvements sequentially due to cost optimization and better utilization offset by furloughs.

A variance between the timing and magnitude of client spending recovery and improving macroeconomic conditions poses a key risk to our estimates.

Key aspects to watch for in Q3:

1. management commentary on demand trends,

2. CY25 budget updates,

3. deal pipelines, and

4. progress on generative AI initiatives.

We revised Wipro’s target price to Rs 220 (Rs 440 earlier) to account for 1:1 bonus issue. The target prices for TCS, Infosys, HCLTech, Tech Mahindra, and Sonata Software have remained unchanged

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