Indian IT sector set to have a washout FY2024, investors to focus on 2025, says JP Morgan

JP Morgan analysts are anticipating that investors will closely examine the forthcoming second-quarter financial results and the commentary provided by Indian IT companies. They will be searching for indications of a rebound in the number of deals being signed in the fiscal year 2025, and expect FY 2024 to be what they described as a “washout.” year. In a recent note released on Wednesday, analysts Ankur Rudra and Bhavik Mehta expressed their pessimism about the sector, stating, “Our outlook on the industry remains bearish, as we have yet to observe a significant increase in demand during our recent assessments. We believe that the overall situation is less favourable than it was in the previous quarter.” All major IT firms, including Infosys, TCS, Wipro and HCLTech have previously warned that clients, the majority of which are US-based, have been lowering their IT spending, delaying and even cancelling contracts, as economic growth slows and on fears of higher-for-longer interest rates. “Investors have assumed FY24 is a washout and shifted focus to FY25, hoping for a rebound,” the analysts said, adding that explained the Nifty IT index outperforming the blue-chip Nifty 50. over the past three months. The focus for this quarter’s earnings reports will be on deal signings as well as the split of new deals versus renewals to assess fiscal 2025 growth, the analysts said. However, Rudra and Mehta said their recent meeting with various industry executives did not show “any meaningful optimism of a demand rebound”. “There are green shoots in certain paths, but overall decision-making and deal ramp-ups remain sluggish.” They remain more negative on the sector than on the broader market. JP Morgan expects high single-digit earnings growth, in percentage terms, for large-cap IT companies in fiscal 2025, while market expectations are for double-digit growth. Similarly, it expects low double-digit growth for mid-cap companies, compared with market expectations of mid-teens growth. Nonetheless, JP Morgan upgraded Infosys to “neutral” from “underweight” saying lower expectations were baked in and its large deal wins give visibility into fiscal 2025. TCS, Infosys and HCLTech report results next week.