Why India IT may have another muted quarter
India's IT sector is projected to experience another quarter of sluggish growth, according to a report by Systematix Institutional Equities. Large-cap IT companies are anticipated to see limited organic revenue growth, ranging from 2% in this fiscal quarter. Tier-I IT firms are expected to witness a slight decline in quarter-over-quarter recurring revenue growth, between -1.5% and 2.0%.
The slowdown in banking, financial services, and insurance (BFSI), manufacturing, and healthcare sectors, coupled with easing client-specific challenges, will likely be offset by weaknesses in other areas, AI-driven pricing pressures, increased competition, and geopolitical risks.
Mid-cap IT firms are expected to outperform their larger rivals. However, large IT services firms are projected to achieve modest improvements in their margins. This improvement is attributed to cost efficiencies and currency tailwinds, which partially counterbalance pricing pressure and wage hikes. Nonetheless, as most growth levers have been utilized, profitability may continue to face challenges. Additionally, some large IT firms might report forex losses due to cash flow hedging.
The brokerage firm highlights that the Nifty IT index has declined by approximately 30% over the past year, resulting in most IT services stocks trading at multi-year lows and significant discounts to their 10-year averages. This decline is driven by weak demand, AI-led deflation, and macroeconomic headwinds. Despite this, the report suggests that resilient margins, strong cash generation, and successful deal wins provide support for the sector.
Furthermore, attractive payout and free-cash-flow yields, along with reduced AI token costs, could present opportunities for leading IT services companies. Current valuation multiples indicate moderate growth expectations, while payout and free-cash-flow yields remain attractive. Lower AI token costs may also create substantial opportunities for leading IT-services firms, with limited downside to valuations from current levels.
Written by urgent.news from The Economic Times's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
