Back in the spotlight! Nomura turns bullish on Indian IT sector; upgrades Infosys, TCS, HCL Tech and Wipro

Global brokerage house Nomura has turned bullish on the Indian IT space. Given the rock-bottom revenue growth rate, brokerage house Nomura sees an end to the declining earnings per share (EPS) cycle for the IT sector.

The broker’s top picks in this space are Infosys, Wipro and TechM among large-caps and Coforge and Birlasoft among mid-caps. It has also changed its ratings, upgrading Wipro from Reduce to Buy, Infosys from Neutral to Buy and HCL Technologies from Neutral to Buy. It has also changed its rating on TCS from Reduce to Neutral.

Nomura further said that potential revenue acceleration from FY26F made it constructive in the IT space. Nomura also revised its earnings by -3 percent to +5 percent for FY25-26F for its IT coverage universe.

Announcement of Q1 fiscal year 2025

“We expect a mixed operating performance for our underwriting universe. Among large caps, we expect the strongest revenue growth at +2.5% QoQ (in constant currency or cc terms) for Infosys and the weakest at -2% QoQ in cc terms for HCL Tech. In midcaps, we expect the strongest revenue growth at +5% QoQ in cc terms for Persistent and the weakest at -2% for LTTS. Barring TCS (impacted by salary hikes) and HCL Tech (impacted by seasonal factors), we expect margins to remain resilient to improving across our underwriting universe,” the broker said, giving a preview of June quarter (Q1FY25) results.

As per the brokerage, Infosys’ 2.5 per cent growth in constant currency (cc) was driven by growth in large deals and elimination of a one-time impact of 100 basis points (bp) from restructuring of a BFSI client contract. Strong seasonal trends are also expected to contribute to the growth. Nomura also expects Infosys to maintain its FY25F revenue growth guidance of 1-3 per cent in cc. It further forecasts that Infosys’ earnings before interest and tax (Ebit) margins will expand by 80 bp quarter-on-quarter, mainly due to the absence of a 100 bp impact from restructuring of a BFSI client contract and elimination of visa costs.

Other factors contributing to Nomura’s optimistic outlook

Nomura also forecasts a gradual improvement in margins for Indian IT companies, driven by growth in large deals and hiring in the second half of fiscal 2025. It forecasts that revenue growth in fiscal 2025 will be boosted by significant cost-cutting initiatives, despite initial transition costs.

After peaking utilisation in H1FY25F, the broker expects headcount to pick up in H2FY25F. To mitigate the challenges, it expects companies to adopt optimisation strategies such as delaying and reducing salary hikes and streamlining contractor spend. It also predicts Ebit margins to improve by 20 to 110 basis points in FY25-26 for large-caps, excluding Tech Mahindra.

Will economic growth bottom out in fiscal 2025?

The brokerage is eyeing a recovery from sluggish revenue growth in Q1FY25, expecting an improvement in the coming quarters. Key factors include potential rate cuts towards the end of CY24 and increased corporate decision-making following the US elections in November 2024.

Additionally, the adoption of generative artificial intelligence (GenAI) technology is expected to drive demand for cloud services and data standardization over the next 12 to 18 months.

Analysts are forecasting that large-cap revenue will increase significantly in fiscal 2026, potentially from about 3% in fiscal 2025 to about 7.7%.

Some history and market trends

In May 2022, Nomura changed its stance on the IT sector, citing an uncertain macroeconomic environment and deteriorating revenue growth prospects for enterprises, which weakened discretionary demand. Since then, the index has risen more than 25 percent to date.

The index is up almost 25 percent over the past year and is expected to rise 5 percent in 2024.

Disclaimer: The views and recommendations presented above are those of the individual analysts or brokerage firms and not Mint. We recommend that investors consult certified experts before making any investment decisions.