IT Firms Show Signs of Recovery, Driven by Discretionary Spending in BFSI

The second-quarter results of the top information technology firms indicate a positive shift, particularly on the back of increased discretionary spending in the banking and financial services sector. However, concerns about the macro-environment amid the ongoing geopolitical crisis continue to be a challenge.

Infosys, Wipro and HCL Tech posted strong Q2 FY25 results with positive future guidance but Tata Consultancy Services (TCS) fell short of investors’ expectations amid margin contraction.

A common trend witnessed across the four major IT exporters was the growth in revenue. Each of the four reported sequential growth in dollar-denominated revenue for the September quarter, following a six-quarter gap since the December 2022 quarter. This increase suggests a gradual recovery in project ramp-ups after a slower pace of execution in the earlier quarters. Although IT companies were securing new orders, delays in ramp-ups had previously impacted their topline growth.

Infosys beat market expectations with strong revenue growth of 3.1 per cent QoQ led by broad-based growth across verticals including BFSI, manufacturing, energy & utilities and hi-tech. Discretionary spending continues to improve in BFSI led by capital markets, mortgages and cards and payments sub-segments but in other verticals, clients are largely prioritising cost optimisation over discretionary spending.

“We continue to value Infosys on 27.5x on Q2FY26-Q1FY27E EPS of Rs 78 to arrive at TP of Rs 2,140. Retain ADD on upbeat guidance and continued improvement in discretionary spending in BFSI,” said ICICI Securities.

The management has revised its revenue growth guidance upwards to 3.5-4.5 per cent (in CC terms) for FY25 while maintaining stable margin guidance in the range of 20-22 per cent.

According to the Axis Securities report, the rising subcontracting cost and cross-currency headwinds may impact the company’s operating margins negatively moving forward.

Except for Infosys, the other three IT firms reported a QoQ improvement in new contract wins. Wipro’s total contract value (TCV) increased to $3,651 million from $3,281 million in the previous quarter.

Wipro had a strong quarter with healthy revenue growth and robust deal momentum as the company continued to secure large deals in the September quarter, with the total contract value (TCV) up 8 per cent on a sequential basis, according to a report by Motilal Oswal.

Wipro’s deal pipeline is also strong, particularly in the BFSI sector, which is witnessing a pickup in discretionary spending.

However, the guidance for the October-December quarter is muted due to furloughs and softness in key regions, particularly in Europe. Additionally, sectors like manufacturing and energy remain soft, with signs of a potential revival but no immediate turnaround making these verticals more of a long-term play.

Motilal Oswal has reiterated the ‘Neutral’ rating citing the current valuation as fair, with the target price of Rs 500 implying 20x Sep’26E EPS.

TCS reported muted September quarter numbers except for marginal momentum in the BFSI segment and steady deal intake. While verticals like manufacturing, energy and regional markets maintained momentum on a YoY basis, Life Science and Healthcare remained under pressure amid client-specific issues, which is expected to stabilize in 3QFY25 and back to growth by 4QFY25, according to a report by Anand Rathi Research.

However, the management is optimistic and sees recovery in Q4 led by a gradual easing of inflation and interest rates, and a good holiday season.

TCS recorded revenue of Rs 64,259 crore, a growth of 7.6 per cent year-on-year (YoY). The company recorded constant currency revenue growth of 5.5 per cent in Q2 FY25.

The PAT for the reported quarter was Rs 16,731 crore, up 6.2 per cent from Rs 15,746 crore in the year-ago period. The EBITDA stood at Rs 11,955 crore, up 5 per cent compared to Rs 11,380 crore in the corresponding quarter.

The company’s deal pipeline remains near an all-time high, new deal TCV (Total Contract Value) wins stood at $8.6 billion, which is in line with a guided range of $7-9 billion.

TCS management remains optimistic on Cloud, cyber security, vendor consolidation, GenAI and outsourcing opportunities from long-term perspectives, which was supported by a strong TCV pipeline.

The brokerage has recommended a ‘Hold’ rating on the stock with an unchanged target price of Rs 4,432 per share.

HCL Technologies beat Q2 number estimates in terms of both revenue and profits. The revenue from operations increased by 8.2 per cent YoY to Rs 28,862 crore on a consolidated basis. In constant currency (CC) terms the revenue grew by 6.2 per cent YoY and 1.6 per cent QoQ. This strong growth is aided by a surge in license revenue of software business while digital revenue grew by 7.8 per cent YoY along with manufacturing, BFSI and recovery seen in ER&D services. The management expects BFSI vertical to witness further improvement, while discretionary spending remains unclear.

According to Axis Securities, HCL Tech is well-positioned for sustained long-term growth, supported by its multiple long-term contracts with leading global brands. “Strong revenue visibility enhances our confidence in the company’s growth prospects. Additionally, we expect a favourable demand environment to reduce uncertainty around discretionary spending,” the domestic brokerage said.

Axis Securities has recommended a ‘Buy’ rating on the stock with a 25x P/E multiple to its FY26E earnings of Rs 83 per share to arrive at a TP of Rs 2,045 per share. The TP implies an upside of 10 per cent from the CMP.

The top IT companies posted a mixed set of results with strong revenue growth driven by increased spending in BFSI sector and optimistic but cautious management commentaries. While investors remain watchful of uncertainties in demand environment on account of potential threat of recession from the world’s largest economies.