New Delhi [India]: Margins for some Indian IT companies are expected to decline in the third quarter of FY25 due to seasonal challenges and structural pressures, according to a report by SBI Securities.
Seasonal Weakness
The report highlighted that the third quarter typically sees reduced working days and furloughs, which impact operational efficiency. Wage hikes are also likely to affect margins for select companies.
“3QFY25 is expected to be seasonally weak due to lower number of working days and furloughs. The margin for few companies may see sequential drop owing to wage hike impact,” the report stated.
Challenges and Concerns
IT companies remain cautious about growth prospects, citing:
- Policy uncertainties under the new U.S. government.
- Client-specific challenges.
- Geopolitical tensions, which continue to impact operations despite the beginning of interest rate reversals in key global markets.
Medium-Term Positives
Amid challenges, the report identified several positive triggers:
- Favorable currency movements.
- Strong deal pipelines.
- Lower attrition rates.
- Early recovery in discretionary spending, particularly in the BFSI (Banking, Financial Services, and Insurance) sector.
- Higher capacity utilization rates.
“On a positive side, currency tailwind, strong deal pipeline, lower attrition, early signs of recovery in discretionary spending especially in BFSI and higher capacity utilization are the key positive triggers in medium term,” the report added.
Sector Performance
- Q2 Trends: Most IT companies reported growth in revenue, EBIT, and PAT on both year-on-year and quarter-on-quarter bases, driven by recovery in BFSI, the sector’s largest revenue contributor.
- EBIT Margins: Improved year-on-year due to offshoring, converting bench employees into billable roles, delayed wage hikes, and reduced attrition.
- Hiring Activity: Increased hiring, with capacity utilization reaching optimal levels of 85-86%.
Outlook for Mid-Cap Players and Emerging Technologies
Mid-cap IT companies are expected to outperform Tier-1 peers, with growth driven by emerging technologies like:
- Generative AI
- Cybersecurity
- Cloud migration
- Internet of Things (IoT)
- Data security
“Midcap IT players are likely to relatively outperform Tier 1 peers,” the report noted.
Cautiously Optimistic Growth for FY25
Despite near-term challenges, the report highlighted a cautiously positive outlook for the industry. Most IT companies anticipate higher growth in FY25 compared to FY24.