Infosys, Wipro, TCS, Coforge, Birlasoft, TechM, HCL Tech, Mphasis: Q1 results preview

Nirmal Bang Institutional Equities in its IT sector preview note said June would be a decent quarter for 11 IT firms including Infosys Ltd, Wipro Ltd, Tata Consultancy Services, Coforge Ltd, Birlasoft Ltd, LTIMindtree Ltd and Mphasis, among others. It said elevated PE multiples of tier-1 and tier-2 IT players are either a sign that there is an earnings upgrade cycle in the offing for FY25 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," it said.

For tier 1 IT players, all eyes would be on whether companies are pointing to any green-shoots in discretionary spending and by when do they expect a pick-up in demand. Besides, it would be seen whether the total contract value (TCV) to revenue conversion problem persists and status of mega/large deal ramp-ups as there have been project cancellations and pauses in the past six months. Lastly, any commentary on when will hiring start would be keenly watched.

Among tier 2 IT firms, eyes would be on whether the mortgage BFS segment recovering for Mphasis, whether Persistent Systems continue to deliver high TCV numbers and Coforge's update on the Cigniti acquisition. Will Birlasoft continue to deliver decent growth in FY25 too, and Zensar's revenue and margin outlook for FY25 will also be keenly watched.

After a 410 bps outperformance by Nifty IT against Nifty in 2023, it has underperformed by 910 bps tear-to-date, although it has recovered 630 bps on month-to-date basis.

"All players are likely to hold on to their revenue and margin guidance as of now. The 2HFY25 rebound hope is at risk due to: (1) US 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," it said.

Nirmal Bang kept its ‘Underweight’ stance on the IT sector as it believes that it is in a ‘slower for longer’ demand environment and the risk is for current consensus estimates to be cut rather than raised.

For TCS, it expects 1 per cent revenue growth QoQ in constant currency (CC) terms, backed by strong order inflow of the last 12 months. It is likely to face cross-currency headwind of 50 bps on QoQ basis.

"For 1QFY25, we think that EBIT margin will contract by 210 bps QoQ to 23.9 per cent. Margins will contract on the back of salary hikes which are effective from 1st April, 2024. Another headwind can be sub-contractor cost which was at 4.6 per cent of revenue in 4QFY24 and may move up depending on demand conditions," it said.

TCS' TCV for 1QFY25 is seen coming in above the guided range of $7-9 billion.

In the case of Infosys, the IT firm is seen reiterating revenue growth guidance for FY25 in the 1-3 per cent CC range. Margin guidance will continue to remain in the 20-22 per cent range, Nirmal Bang said.

"We expect Infosys to report a revenue growth of 2.5 per cent QoQ in CC terms. The company had talked about normal revenue seasonality on its 4QFY24 call. It will face cross currency headwinds of ~50bps. We expect EBIT margin to remain flat QoQ at 20.1 per cent as there are no major factors for margin movement," Nirmal Bang said.

The brokerage sees TCV number in the $3-4 billion range.

In the case of HCL Technologies Ltd, Nirmal Bang expects revenue growth guidance for FY25 at 3-5 per cent in CC terms to be maintained as discretionary spending continues to remain low. It expects margin guidance to remain unchanged at 18-19 per cent EBIT.

"We estimate (0.5 per cent) CC QoQ revenue growth in 1QFY25 as against (1.5 per cent) to 0.5 per cent CC growth guidance, putting us exactly at the mid-point of the guidance. There will be a cross-currency headwind of 70bps," Nirmal Bang said on Wipro.

Nirmal Bang expects Tech Mahindra to deliver 1 per cent CC QoQ growth, which will be impacted by weakness in the CME vertical (37 per cent of sales), although slight improvements are being seen. In 1QFY25, it expects TechM's TCV to be higher than the 4QFY24 TCV of $500 million after remaining below the guided range of $700-1000 million for the 5th consecutive quarter.