Has the IT sector weathered the storm? Experts weigh in

The Indian IT services sector has been in the spotlight as the industry prepares for the start of the April-June quarterly earnings season.

Brokerage houses remain cautious about the sector, assessing whether there are any signs of improvement on the horizon.

The Nifty IT index is up almost 11% this year.

While brokerage firm Nomura predicts the first quarter (April-June) will end a period of slow revenue growth in the sector, Sandip Agarwal, fund manager at Sowilo Investment Managers, believes the worst quarter is behind us.

“This quarter will start with positive surprises, at least on the margin front. I think the revenue growth will also be slightly better than the previous quarter. From a stock price perspective, the last quarter also bottomed out,” Agarwal told CNBC-TV18.

According to Motilal Oswal, the tough period of discretionary spending cuts in the industry seems to be coming to an end, but there is still little sign of improvement in business as usual.

As a result, the first quarter may be one of the weakest in at least a decade.

The brokerage will be watching for signs of a recovery in discretionary spending, such as increased transaction activity, which has so far focused mainly on cost-cutting projects.

Leading IT firms like Tata Consultancy Services, Infosys and Wipro will soon announce their first-quarter results.

Agarwal expects falling employee turnover rates and subcontracting costs to boost margins.

According to him, for large players, every 1% improvement in margin means an increase in earnings per share (EPS) by 6-7%, and for smaller and medium-sized enterprises – from 12% to 20%.

According to Agarwal, the BFSI vertical has reached its lowest point. Deals have been winning in the last four quarters for companies like TCS and

Infosys is showing a strong trend. Only execution needs to improve.

But he doesn’t expect the sector to deliver more than 10% to 12% revenue growth on a constant basis. He estimates 16% to 17% earnings per share growth this year, “which means there’s still 15% to 20% growth even for the big names, with margins improving.”

Pankaj Murarka, CIO of Renaissance Investment Managers, who manages over ₹600 crore in funds, The company has also recently begun over-investing in IT stocks as the worst effects of the economic slowdown have already hit prices and the business situation is expected to improve in the second half of the year.

He predicts that global IT spending will increase significantly next year and believes that IT is one of the few areas of the market where valuations are still fair given future growth.

According to a note by brokerage firm Jefferies, the IT sector is currently valued at 28 times price-to-earnings (P/E) ratio, which is almost a 20 per cent premium over the five-year average for the sector and almost a 35 per cent premium over the Nifty valuation.

Interest rate cuts should also boost demand, while a potential revival in US corporate decisions after the election could further boost economic growth, Nomura said.

Revenue growth in fiscal 2025 is expected to exceed that in fiscal 2024, laying the groundwork for a strong fiscal 2026.

The pace of adoption of generative artificial intelligence (GenAI) is also likely to accelerate over the next 12 to 18 months.

Harsha Upadhyaya, who manages over $45 billion in funds as chief investment officer of Kotak Mutual Fund, has also recently shifted some funds from the auto and industrial sectors to the IT sector.

While Kotak has only marginally increased its holding in IT by reducing its underweight position in some stocks, it still remains below average in terms of investment in the sector.

Even though Upadhyaya does not expect impressive quarterly results, he feels it will be prudent to shift some funds from domestically oriented sectors to more defensive investments such as IT.

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