Indian IT Sector 2025: Tailwinds and headwinds for the sector, Q3 earnings outlook

In 2024, the NIFTY IT index gained 22.3%, outperforming the benchmark NIFTY50. However, earnings remained muted mainly due to cuts in discretionary IT spending across sectors.

Moving forward, hiring in the IT sector in 2025 will be closely watched as it will witness a freeze in 2024. So, at the dawn of 2025, let’s understand the outlook for the sector for the coming year.

Tailwinds in 2025

The Indian IT sector has an optimistic sectoral outlook led by continued digitalisation. After a 7% decline in hiring in 2024 due to adverse macroeconomic scenarios, hiring is anticipated to rise. Hiring will be led by demand for skills in Artificial Intelligence (AI) and Machine Learning (ML) and the flow of large deals.

Now the US election is over, the political uncertainty has blown away, and Donald Trump's return to power is anticipated to strengthen the strategic partnership of US-India. The Fed rate cuts will support demand in the economy and will act as a driver for IT sector growth.

Additionally, the rupee’s depreciation against the dollar would continue to favour the Indian IT sector, which drives significant export revenue. As the preceding year has witnessed a cut in IT discretionary spending, the US IT sector is set to recover. The major IT company Accenture has started reporting strong hiring trends, improving utilisation rate and strong revenue visibility.

Headwinds in 2025

The sector-specific slowdown across domestic and key global markets, including the US and Europe, would pose a challenge to the growth of Indian IT sectors. Manufacturing is likely to experience slow growth globally.

Attrition and employee costs are anticipated to rise due to the competitive job market in 2025 which would make retention plans of companies important to see. The US Visa regulation’s impact on the Indian IT sector will also be observed in 2025.

Q3FY25 Earning Outlook

Accenture's earning performance is considered an indicator for future performance of the Indian IT sector. Accenture reported a higher growth guidance for Q1 i.e. from September 2024 to November 2024. The company raised its revenue growth guidance by 100 bps to 4-7% year-on-year (YoY), which includes around 3% from acquisitions for the ongoing financial year i.e. from September 2024 to August 2025. The increase in guidance indicates strong revenue visibility in Q2 i.e. from December 2024 to February 2025.

Faster deal execution and increased net hiring with declining utilisation levels reflect improvement in revenue visibility for Accenture, similar is expected to replicate in the Indian IT sector as well. The sustainable demand driven by Generative AI is expected to lead to earnings growth.

Stocks to Watch

Currently Nifty IT index outperforms the benchmark index, IT stocks are trading at premium valuation however, the strong earnings growth would sustain premium valuations. Large IT stocks like TCS, Infosys and HCL Tech would be under the spotlight due to their strong financials, robust client relationships and diversified portfolios.

Conclusion

Upcoming 2025 will drive growth for the Indian IT sector supported by strong tailwinds like increasing digitization, rising demand for AI and ML skills, and favourable macroeconomic conditions such as Fed rate cuts and rupee depreciation. However, challenges like a sectoral slowdown, rising employee costs, and competitive pressure will require a focus on retention plans for the companies.