Back in Focus! 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 bottoming out of revenue growth rate, brokerage house Nomura anticipates the end of the earnings per share (EPS) downgrade cycle for the IT sector.

The brokerage's top picks in the space are Infosys, Wipro, and TechM among largecaps, and Coforge and Birlasoft among midcaps. It has also revised its ratings, upgrading Wipro to Buy from Reduce, Infosys to Buy from Neutral, and HCL Technologies to Buy from Neutral. Additionally, it has also changed TCS' rating to Neutral from Reduce.

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

Q1FY25 preview

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

As per the brokerage, Infosys' 2.5 percent constant currency (cc) growth, was driven by the ramp-up of large deals and the elimination of a one-time 100 basis points (bp) impact from restructuring a BFSI client contract. Strong seasonal trends are also expected to contribute to this growth. Nomura also expects Infosys to maintain its FY25F revenue growth guidance of 1-3 percent in cc. Additionally, they project Infosys' earnings before interest and taxes (Ebit) margins to expand by 80 bp Q-o-Q, primarily due to the absence of the 100 bp impact from the BFSI contract restructuring and the elimination of visa costs.

Other factors contributing to Nomura's bullish outlook

Nomura also forecasts a gradual improvement in margins for Indian IT firms, driven by the ramp-up of large deals and increased hiring in the second half of FY25F. It projects that revenue growth for FY25F will be bolstered by significant cost-reduction initiatives, despite initial transition costs.

After reaching peak utilisation levels in the first half of FY25F, the brokerage expects a hiring surge in the latter half of the fiscal year. To mitigate challenges, it anticipates firms will employ optimisation strategies such as delaying and reducing salary hikes and streamlining subcontractor expenses. It also predicts an improvement in Ebit margins by 20 to 110 basis points during FY25-26F for largecaps, excluding Tech Mahindra.

Growth bottoming out in FY25?

The brokerage expects a recovery from sluggish revenue growth in Q1FY25, expecting improvements in the following quarters. Key drivers include potential interest rate cuts in late CY24 and enhanced corporate decision-making following the US elections in November 2024.

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

Looking ahead to FY26F, analysts forecast significant revenue growth for large-cap firms, potentially increasing from around 3 percent in FY25F to approximately 7.7 percent.

A bit of history and market trend

In May 2022, Nomura had shifted to a negative stance on the IT sector, citing an uncertain macroeconomic environment and deteriorating revenue growth prospects for enterprises, which dampened discretionary demand. Since then the index has gained over 25 percent till now.

The index has also advanced almost 25 percent in the last 1 year and added 5 percent in 2024 YTD.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.