IT Companies – Steady quarter, muted H2

Overall Performance of most of IT companies results during the week were better QoQ, and also on overall profitability front. However, the performance ought to be seen with respect what stock prices were pricing in. IT Index has given 25%+ return in last 6 months with LTIM/Infy returning 35-40% during the same. Thus, asking rate of recovery was high and with unchanged outlook on growth recovery, most stocks are correcting after the run up

Revenue Performance: - Broadly healthy QoQ for all the companies
Infosys reported decent revenues in Q2FY25 as revenue increased by 3.1% QoQ/3.3% YoY in CC terms to US$ 4894 mn, with 0.8% growth being inorganic contribution. Segment wise growth was led by Manufacturing (acquisition led) and Energy, up 10.9% and 5.4% QoQ, while BFSI was up 2.7% QOQ.
HCL Tech reported revenue of US$3,445 mn, up 1.6% QoQ & 6.2% YoY in CC terms. Segment wise growth was led by Retail and Public Services, up 4.6% and 3.5% QoQ, while BFSI was flat QoQ.
LTIM reported revenue of US$ 1,126.6 mn, up 2.8% QoQ/ 4.8% YoY (up 2.3% QoQ/ 4.4% YoY in CC terms). All the segments reported growth on a QoQ basis with Health (6.4% of the mix), BFSI (35.6% of mix), Retail (14.5% of the mix), leading with a growth of 6.1%, 4%, 2.8% QoQ. 

Margin Performance – HCL Tech and LTIM witness expansion; acquisition led amortisation restrict Infy Margins to flattish QoQ. Most companies would face wage hike impact in H2FY25, which will largely lead to margins decline

• Infosys EBIT margin remained flat QoQ at 21.1% as tailwinds of 80 bps from Project Maximus and 10 bps from currency movement was offset by 30 bps impact from acquisition (on account of amortization of intangible assets) and 60 bps from higher variable pay
• HCL Tech EBIT Margin at 18.6%, was up 149 bps QoQ/8 bps YoY, owing to operating leverage in services (110 bps), software business tailwind (52 bps) and currency tailwind (24 bps)
• LTIM EBIT Margin increased by ~50 bps QoQ to 15.5%, given the absence of visa cost and currency tailwinds. 

Deal Wins – Remain underwhelming
Infosys Large deal TCV came at US$2.4 bn (41.6% being net new) was down 41% QoQ and 69% YoY, which is underwhelming, However, small deal pipeline growth in double digits was a consolation. LTIM TCV of US$ 1.3 bn, down 7.1% QoQ and flat YoY. HCL Tech during Q2FY25 won TCV deals worth US$2,218 mn, up 13.2% QoQ but down 44.1% YoY. 

Outlook – H2 likely to witness revenue growth moderation; overall commentary unchanged, barring some BFSI greenshoots

The common thread among the companies was H2 likely to be weaker. HCL Tech revised guidance for FY25 to 3.5-5% YoY in CC terms vs (3-5%) earlier, implying a CQGR of 0- 2% QoQ for H2FY25. Similarly, Infosys revised revenue guidance for FY25 of 3.75%-4.5% (vs 3-4% earlier), implies a muted CQGR growth of revenue in H2 of (-)0.7% to 0.2%, owing to seasonality, lower number of billing days etc. LTIM has also indicated for growth moderation for H2FY25
Overall commentary on discretionary demand recovery has been similar that it remains challenging. Nonetheless, BFSI as a segment has seen recovery with cost take out, efficiency and Compliance needs led demand. We expect a clear outlook only post US elections which will also coincide with IT companies clients’ cost planning period.