The IT sector, during the fiscal second quarter, reported in-line operating performance, moderate deal wins and a weak second half outlook. While last year’s record deal wins have supported H1Y25 growth, stable leakages have helped too, though sporadic instances of ramp-downs still linger, stated a report by JM Financial. “FY24’s deal revenues in the base and FY25 deal TCV (FYTD) reverting to historical trend however preclude hopes of growth acceleration. Not surprisingly, most available guidance for H2 underwhelmed,” it said.
The sharp moderation in deal TCV, according to the report, could be explained by two factors – one, stock of mega deals being exhausted as enterprises are done with the bulk of their cost reset, and vendor consolidation exercises; two, ACN has gained share after its recent pivot towards large transformational deals.
More beat than misses
On a sequential basis, top 6 players in the segment reported 0.6 – 3.1 per cent CC growth in Q2. Hit to misses ratio improved further with no misses. Top 5 cumulatively added $350 million of organic incremental revenues QoQ, closer to their long-term trend growth, though favourable FX helped. Even as this suggests normalising leakages, JM Financial said, companies did report client specific ramp downs.
Further, mid-cap companies outpaced larger peers by a margin with both Persistent Systems and Coforge growing at more than 5 per cent. Barring TCS (BSNL-led growth impact), most players met margin expectations, maintained the report, while adding that Tech Mahindra surprised positively again on margins as it made steady progress on turnaround.
Outlook and guidance
Improvement in BFSI was unequivocal. Infosys saw discretionary spend sustaining in capital markets, mortgages and card & payments. HCL saw better discretionary in the Tech sector too, though it was not echoed by others. “Few pockets of stress emerged too e.g Manufacturing in the EU, especially Auto and Aero. Retail/Telecom remains under pressure,” JM Financial said.
H2 outlook was unanimously soft which was reflected in muted guidance revision across players. HCL Tech upped only the lower end of its guidance while Infosys’ guidance revision underwhelmed. KPIT guided to the lower end of its 18-22 per cent band, implying sharp deceleration in H2 as Auto OEMs in EU/US push for offshoring.
Deal wins
Thus far, mega deals have been conspicuously absent in FY25, which has led to 0.35 per cent on-year decline in reported deal TCV for top-5 in H1. The companies in the sector are unperturbed though as they point to a healthy deal pipeline, said JM Financial, while maintaining that lighter bookings in H1 and US elections/geo-political risk led potential delays in H2 signings could however weigh on FY26-beginning growth momentum. “Growth acceleration in FY26 growth will then need to be supported by rebound in short cycle/discretionary deals. Interestingly, Infosys indicated double digit growth in smaller deals (
To conclude, JM Financial stated, “Stocks where results failed to lift earnings saw negative reaction, suggesting incremental re-rating will follow EPS upgrades. Normal furloughs in Q3, unlike last year, could signal easing budget pressure, in our view, which could support EPS. Clarity will however emerge only in Q4. Expect stocks to stay range-bound till then.”
From: financialexpress
Financial News
