Understanding the Indian IT Sector’s Q1 FY25 Earnings: Five Key Factors to Watch Out For

As the Indian information technology (IT) sector prepares to announce its June quarter earnings for the financial year 2025 (Q1FY25), it’s essential to understand the key factors that will shape the industry’s performance. With Tata Consultancy Services (TCS) set to kickstart the earnings season, here are five themes to watch out for in the management commentaries.

Revenue Growth: The Green Shoots of Recovery

Analysts at Kotak Institutional Equities (KIE) expect decent growth sequentially, led by Infosys and LTIMindtree among Tier-1 firms, driven by the lower base from previous quarters. ICICI Securities highlights Persistent Systems as a clear winner, with Infosys and TCS trailing behind. The report expects Persistent Systems to lead the pack with five percent organic growth, while Infosys and TCS will follow with robust sequential growth of two percent and 1.8 percent, respectively. Revenue growth is expected to come from areas such as artificial intelligence (AI), consulting, engineering, research, and development (ER&D), healthcare, and BFSI, as clients focus on critical projects with potential for prompt Return on Investment (RoI).

Discretionary Spending: The Road to Recovery

The commentary on discretionary spending will be closely watched, as analysts believe that while clients remain cautious, the worst may have been over for discretionary spending delays. Nomura’s report states that while a strong recovery in discretionary demand may take a few quarters, it is unlikely to worsen further. AI has been the only area to see continued customer interest, with Wipro standing out in terms of AI-led activities. With clients scrutinizing discretionary spends and focusing on cost optimization, demand commentary from IT companies may not be materially different from the previous quarter.

Gen AI Deal Pipeline: The New Driver of Growth

Generative AI (Gen AI) has become a crucial driver for IT firms, with the Gen AI deal pipeline expanding significantly for companies. TCS, Infosys, and Wipro have reported robust demand for AI services, with sectors like BFSI, healthcare, and retail showing heightened interest in integrating Gen AI services. Accenture’s Gen AI bookings worth over $900 million in the second quarter take the total Gen AI bookings to $2 billion for the fiscal year to date. The Street will look out for other IT companies to quantify the worth of their Gen AI deals won in Q1.

Hiring Outlook: A Cautious Approach

Due to a gradual demand recovery and persistent economic uncertainties, IT firms are adopting a cautious approach to hiring. Companies are focusing on filling essential roles and critical skill gaps rather than expanding their workforce aggressively. Analysts expect hiring to pick up to fuel incremental growth, with an emphasis on lateral hiring to acquire niche skills in areas like AI, cloud computing, and cybersecurity. Attrition rates are expected to remain stable as companies implement measures to retain key talent and reduce turnover.

Deal Wins: The Ramp-Up of Large Cost-Takeout Deals

The ramp-up of large cost-takeout deals is expected to drive growth for large-cap IT companies in this traditionally strong quarter. However, the IT industry is bracing for one of the weakest first quarters in a decade, highlighting the continued sluggishness in the flow business. The focus will be on signs of recovery in discretionary spending and whether the ramp-up in deal activities can offset the ongoing challenges. Verticals such as BFSI and communications may see some growth acceleration due to recent deal wins, while the hi-tech sector might face renewed challenges as software spending moderates.

Conclusion

As the Indian IT sector prepares to announce its Q1FY25 earnings, it’s essential to understand these five key factors that will shape the industry’s performance. With a cautious approach to hiring, a focus on Gen AI deal pipeline, and a ramp-up of large cost-takeout deals, the sector is expected to recover gradually. As students preparing for competitive exams, it’s crucial to understand these themes to stay ahead of the curve in the IT sector.

Historical Context:

The Indian IT sector has been facing challenges in recent years due to various factors such as global economic uncertainty, changes in government policies, and increasing competition from low-cost countries. The sector has been experiencing a slowdown in growth, with many companies reporting declining revenues and profits. However, there are signs of recovery, with some companies reporting improved earnings and growth in certain areas such as artificial intelligence (AI) and cloud computing.

Key Factors to Watch Out For:

• Revenue Growth: Analysts expect decent growth sequentially, led by Infosys and LTIMindtree among Tier-1 firms, driven by the lower base from previous quarters. Revenue growth is expected to come from areas such as AI, consulting, engineering, research, and development (ER&D), healthcare, and BFSI, as clients focus on critical projects with potential for prompt Return on Investment (RoI).

• Discretionary Spending: The commentary on discretionary spending will be closely watched, as analysts believe that while clients remain cautious, the worst may have been over for discretionary spending delays. AI has been the only area to see continued customer interest, with Wipro standing out in terms of AI-led activities.

• Gen AI Deal Pipeline: Generative AI (Gen AI) has become a crucial driver for IT firms, with the Gen AI deal pipeline expanding significantly for companies. TCS, Infosys, and Wipro have reported robust demand for AI services, with sectors like BFSI, healthcare, and retail showing heightened interest in integrating Gen AI services.

• Hiring Outlook: Due to a gradual demand recovery and persistent economic uncertainties, IT firms are adopting a cautious approach to hiring. Companies are focusing on filling essential roles and critical skill gaps rather than expanding their workforce aggressively. Analysts expect hiring to pick up to fuel incremental growth, with an emphasis on lateral hiring to acquire niche skills in areas like AI, cloud computing, and cybersecurity.

• Deal Wins: The ramp-up of large cost-takeout deals is expected to drive growth for large-cap IT companies in this traditionally strong quarter. However, the IT industry is bracing for one of the weakest first quarters in a decade, highlighting the continued sluggishness in the flow business.

Summary in Bullet Points:

• The Indian IT sector is expected to report decent revenue growth sequentially, led by Infosys and LTIMindtree among Tier-1 firms. • Discretionary spending is expected to remain cautious, but the worst may have been over for discretionary spending delays. • Gen AI deal pipeline is expanding significantly for IT firms, with sectors like BFSI, healthcare, and retail showing heightened interest. • IT firms are adopting a cautious approach to hiring, focusing on filling essential roles and critical skill gaps. • Deal wins are expected to drive growth for large-cap IT companies, particularly in areas like BFSI and communications. • The sector is expected to recover gradually, with a focus on Gen AI deal pipeline and ramp-up of large cost-takeout deals.