Nomura has high hopes from Infosys, Coforge ahead of Q1FY25 results

Nomura bullish on IT sector: Tokyo, Japan-based brokerage Nomura is optimistic about the Indian IT sector. Given the bottoming out of revenue growth rate, analysts expect the earnings per share (EPS) downgrade cycle to come to an end for the sector. 

“Potential revenue acceleration from FY26F makes us constructive. We tweak our earnings by -3 per cent to +5 per cent for FY25-26F for coverage universe,” Abhishek Bhandari and Krish Beriwal, research analysts at Nomura said in a note.

Therefore, analysts have upgraded their ratings to ‘Buy’ for Wipro (from Reduce), Infosys (from Neutral) and HCLTechnologies (from Neutral). They have also upgraded TCS to Neutral (from Reduce). 

“Our top picks in the sector are Infosys, Wipro and Tech Mahindra (among large caps), and Coforge and Birlasoft (among midcaps),” Nomura said.

Analysts anticipate Infosys to achieve a quarter-on-quarter (Q-o-Q) constant currency (cc) growth of 3 per cent, propelled by the ramp-up of large deals and the absence of a one-time 100 basis points (bp) impact from restructuring a Banking, financial services and insurance (BFSI) client contract. 

Strong seasonal patterns are also expected to contribute to this growth. Infosys is likely to maintain its FY25F revenue growth guidance of 1-3 per cent in cc, Nomura said.

Earnings before interest, taxes (Ebit) margins for Infosys, they believe, are projected to expand by 80 bp Q-o-Q, primarily due to the non-recurrence of the 100 bp impact from the BFSI client contract restructuring and the absence of visa costs, providing further support. 

Analysts further highlighted the importance of monitoring updates on cost reduction initiatives, the banking sector performance, and insights into client discretionary spending trends.

In contrast, Coforge is expected to achieve a Q-o-Q cc growth of 1.5 per cent. However, analysts anticipate a 150 bp decline in Ebit margins Q-o-Q, driven by increased hiring to support expected growth in the remaining quarters of FY25F.

Key areas of interest for Coforge, analysts believe,  include commentary on overall demand trends, developments in the banking vertical, significant deal wins, and expectations regarding client discretionary spending in CY24.

Other factors for this bullish outlook:

Margins to improve with higher deal ramp-up, hiring in 2HFY25F

Nomura anticipates a gradual improvement in margins driven by the ramp-up of large deals and increased hiring expected in the second half of FY25F.  Analysts project that FY25F revenue growth will be fuelled by substantial cost reduction initiatives, albeit with initial transition costs. 

Following peak utilisation levels in the first half of FY25F, Nomura foresees a surge in hiring during the latter half of the fiscal year. It expects Indian IT firms to leverage optimisation strategies such as delaying and reducing salary hikes, and streamlining subcontractor expenses to mitigate these challenges. They predict an enhancement in Ebit margins ranging from 20 to 110 basis points during FY25-26F for large caps (excluding Tech Mahindra).

Growth bottoming out in FY25F

Analysts foresee a turnaround from sluggish revenue growth in Q1FY25, expecting improvement in subsequent quarters.

Anticipated factors, analysts noted, include potential interest rate cuts in late CY24 and enhanced corporate decision-making post US elections in November 2024. 

Furthermore, the adoption of Generative AI (GenAI) technologies is expected to drive demand for cloud services and data standardisation over the next 12-18 months.

Looking ahead to FY26F, analysts predict major revenue growth for large caps, potentially increasing from around 3 per cent in FY25F to approximately 7.7 per cent.

Q1FY25 results preview

Analysts predict a varied operating performance across their coverage universe for Q1FY25F. Among large caps, analysts believe, Infosys is anticipated to lead with the strongest revenue growth, expected at +2.5 per cent quarter-on-quarter (Q-o-Q) in constant currency (cc) terms. 

In contrast, HCL Tech may experience a decline of -2 per cent Q-o-Q in cc, primarily attributed to seasonal factors.

Moving to mid-caps, Nomura said, Persistent is projected to exhibit robust revenue growth of +5 per cent Q-o-Q in cc, while LTTS faces a potential decline of -2 per cent.

With the exception of TCS and HCL Tech, where recent salary hikes and seasonal impacts are likely to affect margins, analysts believe stability to improvement is expected across the coverage universe.

That apart, risks to this bullish outlook remain, including persistent sluggish revenue growth and the possibility of weaker-than-expected margins in FY26F.