IT services to report profit margin at 22% in FY25; Coforge, LTIMindtree up 4-5% | Stock Market News

Information technology (IT) services companies will likely report muted revenue growth at four to six per cent in the current fiscal year 2024-25 (FY25) for a second consecutive year. Despite the challenges, domestic credit rating agency ICRA projects the sector’s operating profit margin (OPM) to remain healthy at ~22 per cent in FY2025, with attrition levels having declined considerably and expected to stabilise over the near term. 

Major IT services companies, including Coforge, Cyient, and LTIMindtree, extended gains during Tuesday’s market session after the sector outlook. Despite expectations of subdued growth, ICRA maintains a stable outlook on the IT services sector. This outlook is led by expectations of healthy earnings, cash flow generation, and the players’ strong balance sheets.

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IT services near-term outlook

Commenting on the near-term expectations, Deepak Jotwani, Vice President & Sector Head – Corporate Ratings, ICRA, said, “ICRA expects FY2025 to be the second consecutive year of muted revenue growth, estimated at 4-6 per cent, given the lower discretionary technological spends by clients amid persistent macro-economic uncertainty in the key markets of US and Europe.”

–Revenue Growth: Higher inflation and interest costs have exerted pressure on clients across key industries, with an increasing focus on cost optimization/business-critical projects and deferment of large discretionary spending. Though order revenue conversion has slowed down, the order book and deal pipeline of most IT services companies remains strong. 

The credit rating agency added this, coupled with clients’ increasing prominence of technological spending as part of their overall capital allocation strategy, is expected to support growth momentum once the macroeconomic headwinds subside over the medium term.

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Revenue growth for Indian IT services companies has remained tepid in the last six quarters as the industry continues to face challenges from macroeconomic headwinds in key markets. 

“Despite tepid revenue growth, ICRA expects the OPM for its sample set companies to remain healthy at ~22 per cent in FY2025, supported by easing out of wage cost inflation and optimising operational efficiencies”, said Jotwani. 

In terms of geographic split of revenues, the Indian IT services industry generates a lion’s share from the US, followed by Europe and the Rest of the World (RoW) markets.  The industry remains susceptible to macroeconomic uncertainties and any adverse regulatory changes in these markets. 

For example, revenue growth in the US has moderated sharply in recent quarters as macroeconomic headwinds continue to intensify. However, despite the moderation, growth in Europe has been more resilient than in the US.

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–Gen-AI, attrition estimates: Higher adoption of generative AI (Gen-AI) remains a key monitorable for the industry over the medium to long term. Leading IT services companies have trained a sizeable portion of their employee base in Gen-AI skills and have started ramping up their capability and service offerings to deliver AI-based solutions to their clients. 

While the order book or revenue contribution from Gen-AI deals is limited, it will likely pick up over the medium term as overall technology adoption is more pervasive. Moderation in demand, coupled with the increased utilisation of excess manpower capacity added in FY2023, has exerted pressure on hiring by IT services companies in recent times. 

While negative net addition declined considerably in Q1 FY2025, ICRA expects hiring to remain muted soon until the growth momentum matures. Hiring by IT services companies was at an all-time high in FY2022 and H1 FY2023, buoyed by strong demand for digital technologies to combat the surge in attrition

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“The LTM attrition for ICRA’s sample set companies tapered to 13.1 per cent in Q1 FY2025 from 23.2 per cent in Q2 FY2023 as the overall slowdown in growth momentum and strong hiring in the previous fiscal corrected the demand-supply mismatch witnessed earlier. ICRA expects attrition levels to stabilise at a long-term average of 12-13 per cent in FY2025,” Jotwani added.

Despite continued substantial dividend pay-outs/share buybacks and inorganic investments, the domestic rating agency expects the financial profile of most industry players to remain strong, supported by healthy cash flow generation, lower debt, and robust liquidity.

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IT stocks on fresh uptrend after brokerage estimates

On Tuesday, shares of Coforge hit five per cent upper circuit at ₹6,872 and settled over four per cent higher at ₹6,807.20 apiece on the BSE. Happiest Minds Technologies gained two per cent to hit an intra day high of ₹814.90. Cyient Ltd also gained three per cent today, while LTIMindtree also settled three per cent higher near its 52-week high mark.

Domestic brokerage firm Motilal Oswal Financial Services’ top stock picks in the IT space include HCL Technologies, LTIMindtree, and Persistent Systems. The brokerage emphasized that the IT services sector may be on the verge of recovery following an extended period of cuts in discretionary spending.

The brokerage outlined a positive outlook for the next two to four years, signalling the end of a challenging phase and the beginning of sustained growth in smaller deals and business flow. HCL Technologies is expected to lead large-cap revenue growth, while Persistent Systems is identified as the fastest-growing IT services company in the brokerage’s sample firms.

Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.