IT Companies' Revenue Revival Expected by FY26

India IPO

Updated July 11, 2024

Muted discretionary IT spending amid a weak global macro-economic situation and slower client decision-making have also made it difficult to predict a revenue recovery for the IT sector

IT Companies' Revenue Revival Expected by FY26

The outlook for Indian information technology (IT) companies remains bleak. FY24 proved disappointing, with anticipated revenue recovery failing to materialize.

FY25 doesn't promise much improvement either, as muted discretionary IT spending and a weak global macro-economic environment are expected to continue hindering growth.

Key Challenges

The decline in discretionary demand has impacted revenue growth across major IT business sectors. Efforts to focus on cost-efficiency programs and slower client decision-making have made predicting revenue recovery difficult.

Despite strong deal wins in Q4FY24, the conversion of these deals into revenue growth remains slow. Key sectors such as BFSI, hi-tech, and retail, along with major markets like the US and Europe, continued to face pressure last quarter.

Tech spending projections for 2024 from six major US banks do not inspire confidence compared to 2023. A report from Kotak Institutional Equities highlights a significant deceleration in tech spending growth across most banks, with JPMorgan being an exception.

FY25 guidance reflects this cautious outlook, falling short of analysts’ expectations and failing to restore investor confidence. Infosys Ltd expects 1-3% year-on-year growth in FY25, while HCL Technologies Ltd projects 3-5% growth. However, tier-2 companies like Coforge Ltd and Cyient Ltd have also lowered their growth expectations.

Lower sub-contracting costs and better utilization helped Q4FY24 margins, but these have not prevented earnings downgrades. Significant revenue growth is not expected until FY26.

IDBI Capital Markets has reduced revenue and earnings per share estimates for FY25 by 4% for large caps and by 3% and 7% for midcaps, respectively.

Potential Comfort for Investors

Interest rate cuts by the US Federal Reserve could offer some relief, boosting confidence in the BFSI sector and potentially reviving discretionary IT demand. The European Central Bank’s recent rate cut and the upcoming US presidential elections, which might bring changes to H1-B visa rules, are also worth watching.

In 2024, the Nifty IT index has declined by nearly 3%, underperforming the Nifty 50's 7% gain. Valuation multiples for tier-1 and tier-2 companies have further cooled off. However, given the prevailing uncertainties, this may not be enough to attract investors.