Q3FY25 earnings preview: Will mid-size IT firms outshine big names?

The Q3FY25 earnings season will kick off soon, with TCS announcing its results on January 9, followed by HCL Tech, Infosys and Tech Mahindra. The October-to-December quarter is usually a muted quarter for IT companies, considering the holidays and lower deal wins in EU and US markets. The Q2 earnings season was also largely muted for the sector with some select names posting better-than-industry results.

During Q3FY25, the NIFTY IT index outperformed the benchmark NIFTY50 in 2024 by a wide margin as it rose nearly 3.3% as compared to a -8.8% fall in the NIFTY50.

Muted top-line growth

Q3FY25 is expected to witness muted-to-moderate top-line growth for most of the IT companies, especially the big players. Companies like TCS, Infosys, Tech Mahindra and Wipro are expected to post largely flat-to-moderate growth in revenue, largely due to lower deal wins and weakness in discretionary spending in Auto and manufacturing verticals. However, a slight uptick in BFSI spending is expected to provide a cushion for overall growth.

Mid-sized IT companies like LTTS, Tata Elxsi, Birlasoft and Happiest Minds are expected to outperform larger peers with strong deal wins and acquisitions. The top-line growth in mid-sized IT firms is expected to be in the range of 4% to 10% as per consensus estimates.

Operational efficiency

Operating profits in Q3FY25 are expected to be in line with estimates, with rupee depreciation aiding margin expansion. However, some mid-sized companies are expected to see a dent in margins as wage hikes and a surge in hiring are expected to offset the positive impact of the rupee depreciation.

In company-specific developments, LTI Mindtree, Persistent Systems and Happiest Minds are expected to see margin improvements due to better utilisation and pricing, especially in the BFSI and Insurance sectors. In addition, hiring trends suggest strong growth in Gen AI related hiring adding some pressure on margins.

Guidance and outlook

With no fireworks expected from the earnings in the Q3FY25 earnings season, the guidance and outlook remain key triggers to watch out for. The softening of interest rates in the West has started showing signs of improvements in deal continuation. Commentary on the change of policy impact under the Trump 2.0 administration will remain in focus. Lastly, any increase in the investments in Gen AI and the outlook on deal wins will provide a major tailwind for the sector.

In a recent development for the sector, the global IT major Accenture PLC revised its revenue guidance higher to 3.4% for the rest of FY25. The commentary by Indian IT majors like Infosys, TCS and Wipro will be keenly watched.

Q2FY25 earnings review

Earnings for the September quarter were largely in line with consensus estimates. As per data from Ace Equity, the revenue of the NIFTY IT index constituents grew by 3.3% QoQ for Q3FY25 and the operating profit also remained in line with the revenue growth at 2.9% QoQ. This was largely due to sector-specific challenges faced by the IT sector. The sluggish growth in the Automotive segment in the US and EU markets impacted deal renewals for some IT companies. However, strong deal wins from BFSI and Insurance segments supported operational margins.

In conclusion

The overall earnings for IT companies are expected to remain in the muted-to-moderate range. Mid-size IT firms are expected to outperform the large players, largely due to company-specific developments and sector tailwinds. Guidance and outlook on new deal wins and investment pipeline for Gen AI products will be keenly watched for.