Uncertainties surrounding rate cuts and the escalation of tariff wars will influence the sentiments in the near term and prolong the information technology (IT) sector recovery, said a report by Mirae Asset Sharekhan.

In the short run, both global and domestic factors will impact the IT sector recovery, the report added. However, the report added that the medium- and long-term outlook for Indian IT companies remains positive as enterprises are expected to gradually raise their discretionary spending.

The report added that management commentaries reflect a gradually improving macro environment with green shoots emerging in discretionary spending, especially in Banking, Financial Services, and Insurance (BFSI), while the deal pipeline remains strong. IT companies are expected to engage in a larger degree of transformational programs to stay relevant and agile in an evolving technology and AI-driven landscape, the report added.

As per the report, in terms of revenue trends, Tier-1 IT companies reported constant currency (CC) revenue growth of 0-3.8 percent quarter on quarter (qoq), impacted by seasonality and furloughs.However, most Tier-2 IT companies bucked the Q3 seasonality, showed greater resilience and reported stronger revenue growth relative to their larger peers.

Most Tier-1 IT companies saw EBIT margin rise sequentially, largely aided by operating efficiencies from margin improvement programs despite wage hike impact taken by some, the report said. According to the report, Tier-2 IT companies reported a mixed EBIT margin trend on a sequential basis.In terms of deal win momentum, which refers to the speed and positive trend of closing sales deals, the report pointed out that deal win momentum, which refers to the speed and positive trend of closing sales deals, has improved for most IT service companies on a year-on-year basis.

The report, going further, highlighted key risks in the upcoming quarter. It added that rupee appreciation and adverse cross-currency movements, the contagion effect of the banking crisis, persisting macro headwinds, and recession in the US can moderate the pace of technology spending.

Published on February 16, 2025