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Analysts at J.P. Morgan are closely watching upcoming second-quarter results and commentary from Indian IT companies for any indicators of a recovery in deal signings as the sector grapples with what they describe as a “washout” year.
In a note released on Wednesday, analysts Ankur Rudra and Bhavik Mehta expressed a cautious outlook for the Indian IT sector, stating, “We remain negative on the sector as we haven’t seen a meaningful uptick in demand in our recent checks. We think the overall setup is not as positive as last quarter.”
All major IT firms in India, including Infosys, TCS, Wipro, and HCLTech, have previously cautioned that their predominantly U.S.-based clients have been reducing their IT spending, delaying, and, in some cases, canceling contracts. These actions have been driven by concerns related to slowing economic growth and the anticipation of sustained higher interest rates.
“Investors have assumed FY24 is a washout and shifted focus to FY25, hoping for a rebound,” the analysts noted. This shift in focus has been reflected in the performance of the Nifty IT index, which has outperformed the broader Nifty 50 index over the past three months.
As the earnings season for this quarter approaches, analysts and investors will be closely examining deal signings and distinguishing between new deals and renewals. These metrics will help assess the potential for growth in fiscal 2025.
However, despite the anticipation, Rudra and Mehta indicated that their recent discussions with industry executives did not reveal “any meaningful optimism of a demand rebound.” They highlighted that while there are some encouraging signs in specific areas, the overall pace of decision-making and deal ramp-ups remains sluggish.
In comparison to broader market expectations, J.P. Morgan has a relatively conservative outlook for the IT sector. They anticipate high single-digit earnings growth for large-cap IT companies in fiscal 2025, whereas the market has more optimistic expectations of double-digit growth. Similarly, J.P. Morgan expects low double-digit growth for mid-cap IT firms, while market expectations lean towards mid-teens growth.
Despite their overall skepticism, J.P. Morgan did upgrade Infosys to a “neutral” rating from “underweight,” citing that lower expectations have already been factored in, and the company’s significant deal wins provide visibility into fiscal 2025.
Looking ahead, investors and industry observers will be closely monitoring the upcoming results from TCS, Infosys, and HCLTech, scheduled for release next week. These reports will provide valuable insights into the state of the Indian IT sector and its prospects for the future.
