Whalesbook
Indian IT companies faced a mixed second quarter with most exceeding revenue expectations and improving margins, aided by currency effects and cost savings. Infosys and HCL Technologies raised their FY26 guidance, but client spending remains cautious. Strong deal wins, particularly in AI, were a highlight, though revenue visibility is murky. The sector anticipates a slow Q3, with the Nifty IT index down 16% year-to-date.
India's leading IT companies reported a mixed performance in the September quarter (Q2), with a majority exceeding analysts' lowered revenue growth predictions. This marks an improvement from the previous quarter, indicating some resilience. Margin performance also saw an uptick, with more than half of the companies surpassing expectations, driven by favorable foreign currency movements (a weaker rupee) and stringent cost-saving initiatives like automation and reducing senior staff. Infosys Limited and HCL Technologies notably raised the lower end of their FY26 revenue growth guidance, reflecting success in executing large deals won earlier.
However, the overall revenue visibility for the sector remains uncertain. While the Banking, Financial Services, and Insurance (BFSI) segment showed a recovery, manufacturing and consumer businesses faced challenges due to tariffs. Companies indicated that clients are still taking longer to make spending decisions. Deal wins were healthy, boosted by cost takeout deals (aimed at permanent expense reduction) and AI-led projects, with total contract value seeing a significant year-on-year increase. Despite this, large cost takeout deals often come with lower margins, necessitating a recovery in discretionary spending or further rupee depreciation. Competition is also intensifying, potentially leading to irrational pricing.
A key trend is the increased focus on Artificial Intelligence (AI) investments. Tata Consultancy Services is entering the sovereign data centre space, and HCL Technologies has disclosed its 'Advanced AI' revenue. Other firms are enhancing AI-driven solutions to strengthen offerings and secure new deals.
The outlook for the December quarter (Q3) is subdued, typically a slow period due to employee holidays (furloughs) and fewer working days. Management expects similar revenue impacts from furloughs as the previous year. Wage hikes may also influence margins for some companies.
Global macro-economic uncertainties have led to earnings downgrades and pressure on IT stocks, with the Nifty IT index down 16% year-to-date in 2025, underperforming the broader Nifty50. Analysts project modest revenue growth for FY27.
Impact
This news significantly impacts the Indian stock market by influencing the performance of the IT sector, a crucial component of major indices. It reflects the health of Indian businesses engaged in global IT services and provides insights into their competitive positioning and future growth prospects. Investors will closely monitor these trends for strategic allocation decisions.
Difficult Terms Explained:
Revenue visibility: The clarity and certainty about a company's expected future revenue. A murky visibility means it's hard to predict future earnings accurately.
Sequential revenue growth: Revenue growth from one quarter to the next, comparing the current quarter's revenue to the previous quarter's.
Earnings before interest and tax (EBIT) margin: A measure of a company's profitability that shows how much profit is generated from its core operations before accounting for interest expenses and taxes. It is expressed as a percentage of revenue.
Foreign currency movements: Changes in the exchange rates between different currencies. A falling rupee against currencies like the US dollar can increase the rupee value of revenue earned in dollars.
Cost containment measures: Strategies and actions taken by companies to reduce or control their expenses to improve profitability.
Offshore offerings: Services or products delivered from locations that are geographically distant from the customer, often chosen for lower operational costs.
Banking, Financial Services and Insurance (BFSI): A broad sector of the economy that includes banks, credit unions, insurance companies, investment firms, and other financial institutions.
Tariffs: Taxes imposed by governments on imported or exported goods, which can affect business costs and demand.
Cost takeout deals: Contracts where a client's primary goal is to permanently reduce their operational expenses, often by outsourcing to a service provider.
Discretionary spending: Spending by consumers or businesses on non-essential goods or services that can be adjusted based on economic conditions.
Rupee depreciation: A decrease in the value of the Indian Rupee in relation to other currencies, making Indian exports cheaper for foreign buyers and imports more expensive.
Sovereign data centre: A data center whose operations and data storage are strictly controlled by a nation's government, ensuring data privacy and security according to national laws.
Furloughs: Temporary unpaid leaves of absence for employees, often implemented by companies to cut costs during slow periods.
Wage hikes: Increases in employee salaries.
Global macro-economic scenario: The overall state of the world economy, considering factors like global growth rates, inflation, interest rates, and trade balances.
Earnings downgrades: When financial analysts reduce their forecasts for a company's future earnings.
Valuations: The process of determining the current worth of an asset or a company. In stock markets, it refers to how the market values a company's stock relative to its earnings or assets.
Nifty IT index: A stock market index on the National Stock Exchange of India that tracks the performance of IT companies listed on the exchange.
Nifty50: The benchmark index for the Indian equity market, comprising the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange.
Tier-1 IT companies: The largest, most established, and most significant companies in the IT services industry.
Structural headwinds: Long-term challenges or unfavorable trends that hinder an industry's or company's growth potential or profitability.
