In a recent report, Nomura has turned bullish on the Indian IT sector. It expects revenue growth to stabilise and believes that EPS downgrade cycle is set to end. The firm has identified Infosys and Coforge as its top picks.
Wipro, Infosys and HCL Tech see ratings upgrade
It has upgraded its ratings to Buy for Wipro (from Reduce), Infosys (from Neutral), and HCL Technologies (from Neutral). TCS has been upgraded to Neutral (from Reduce). Among large caps, Infosys, Wipro, and Tech Mahindra are the top picks and Coforge and Birlasoft are favoured among midcaps.
Nomura has adjusted its earnings estimates for FY25-26F, ranging from -3% to +5% across its coverage universe. The expected revenue growth in FY25F will be driven by large cost take-out projects, despite initial transition costs.
With utilization peaking in the first half of FY25F, hiring is anticipated to increase in the second half. To manage costs, Indian IT companies are likely to employ optimization strategies such as delayed and lower salary hikes and rationalizing subcontractor expenses, leading to EBIT margin improvements of 20-110 basis points for large caps (excluding Tech Mahindra) in FY25-26F.
Revenue growth to stabilise
The report indicates that Q1FY25 will likely mark the low point for sluggish revenue growth in the Indian IT services sector. Nomura’s proprietary database suggests a stabilizing revenue growth outlook for G2000 companies, particularly in the BFSI vertical. Although a strong recovery in discretionary demand may take a few quarters, it is unlikely to worsen further.
Factors such as a potential interest rate cut cycle in the second half of CY24 and changes in decision-making by US corporates post-US elections in November 2024 could boost demand.
Additionally, the adoption of Generative AI (GenAI) is expected to gain momentum in the next 12-18 months, enhancing demand for cloud services and data standardization. Nomura projects revenue growth for large caps to increase from approximately 3% in FY25F to 7.7% in FY26F.
Infosys, Persistent to see strong revenue growth
In its Q1 FY25F results preview, Nomura anticipates a mixed operating performance across its coverage universe. Among large caps, Infosys is expected to show the strongest revenue growth at +2.5% quarter-on-quarter (q-q) in constant currency (cc) terms, while HCL Tech is expected to see the weakest at -2% q-q in cc.
Among mid-caps, Persistent is expected to lead with +5% q-q revenue growth in cc, while LTTS is expected to lag at -2%. Margins are expected to remain stable or improve across the coverage universe, with the exception of TCS (affected by salary hikes) and HCL Tech (impacted by seasonal factors).
Nomura’s optimistic outlook for the Indian IT sector reflects confidence in the stabilization of revenue growth and potential for margin improvement, driven by strategic cost management and emerging demand drivers.
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