Q2 FY25 IT Earnings: A Mixed Bag with Positive Hiring Trends

The Q2 FY25 earnings for Indian IT companies have been a mixed bag, with some companies meeting or exceeding Street expectations while others fell short. At the same time, hiring trends in the IT sector show positive momentum, with leading companies resuming hiring after a period of headcount reduction. This article delves into the earnings performance, emerging trends in the sector, and hiring developments, along with insights on what investors should consider going forward.

Q2 FY25 Earnings Overview

The Q2 earnings season saw mixed results from India’s top IT companies. While revenue growth and margins were largely in line with expectations, the performance across companies varied. Major players like Infosys and TCS met expectations, while others, like Wipro and HCLTech, saw some divergences.

Revenue Performance: Most IT companies delivered revenue growth in line with Street expectations. TCS and Infosys, the two largest players, reported steady growth, although margins came under pressure. HCLTech, despite reporting a decline in its headcount, showed strong revenue growth of 6.2% in constant currency (CC), surpassing market expectations.

Margins: Margins were mixed in this quarter. While Infosys and TCS saw a slight miss in their margins, Wipro and HCLTech delivered better-than-expected margin performance. This divergence in performance was driven by factors such as wage hikes and discretionary spending across key sectors.

Sectoral Growth: A key positive trend in Q2 FY25 was the continued momentum in the BFSI (Banking, Financial Services, and Insurance) sector. BFSI, which contributes 30-35% of industry revenue, saw broad-based growth with increased discretionary spending. The management commentary from top IT firms suggests that this momentum is likely to continue into the next quarter, which is an encouraging sign for the industry.

Another positive development was the resurgence of hiring, which had taken a backseat during the previous quarters due to macroeconomic uncertainties and the need to improve utilization rates.

Hiring Trends in the IT Sector

The top four Indian IT companies — TCS, Infosys, Wipro, and HCLTech — resumed their hiring momentum in Q2 FY25 after several quarters of headcount decline. This marks a significant shift as the IT sector had been cautious in the previous fiscal year due to macroeconomic concerns and a slowdown in demand in key markets.

Headcount Growth: Collectively, these four IT majors added 8,380 employees during Q2 FY25. TCS led the pack with a net addition of 5,726 employees, followed by Infosys with 2,456. Wipro added 978 employees, although this figure was adjusted for an error in its Q1 headcount reporting. HCLTech, however, was the only one among its peers to report a decline in headcount, reducing its employee base by around 780 employees.

Fresher Hiring: IT companies are also focusing on hiring freshers. TCS aims to hire 40,000 freshers in FY25, with over half of this target already met by Q2. Infosys has set a fresher hiring target of 15,000-20,000, while Wipro plans to onboard 10,000-12,000 freshers in FY25. HCLTech is aiming for 10,000 freshers, having already hired 4,010 by the end of Q2.

Hiring as a Forward Indicator: The resumption of hiring, especially the addition of freshers, indicates that IT companies are optimistic about future demand. This trend is seen as a forward indicator of growth, reflecting the confidence of IT firms in their ability to secure more projects and expand their service offerings. In addition to fresher hiring, lateral hiring has also picked up, which shows that companies are preparing for a sustained increase in demand.

Looking Ahead:

While the Q2 earnings reflect some stability in the IT sector, the outlook for the next quarter (Q3 FY25) remains cautious. Companies like Wipro have provided muted guidance, citing seasonal factors such as furloughs and lower working days as potential headwinds. The wage hikes scheduled for Q3 are expected to impact margins further, adding another layer of caution to the outlook.

Valuation and Stock Performance: The stock market has already priced in much of the optimism around IT companies, with many of them witnessing significant rallies since June 2024. Infosys, for example, saw its stock price rise nearly 40% since the start of the rally. Despite the recent correction following its Q2 numbers, Infosys remains highly valued. TCS continues to be a favorite, while Wipro, trading at a discount, has seen a strong stock price recovery due to its slightly better-than-expected earnings.

However, the high valuations mean that the room for error in future quarters is minimal. Investors should keep in mind that while BFSI and other key sectors are showing signs of strength, challenges such as wage hikes and macroeconomic uncertainties persist. In particular, the impact of wage increases on margins is expected to be a key theme in Q3.

What Should Investors Do?

The IT sector continues to show resilience despite macroeconomic challenges. The hiring resurgence is a positive sign, and the BFSI sector’s strong performance bodes well for the industry’s near-term prospects. However, with valuations already elevated, investors need to approach the sector with a balanced strategy.

• Long-Term Investors: Those with a long-term view should focus on IT companies with strong fundamentals and diversified client bases, like TCS and Infosys. These companies are well-positioned to weather short-term volatility and capitalize on the expected growth in demand.
• Short-Term Investors: For short-term investors, the current high valuations may limit the upside potential. With Q3 expected to be a slower quarter due to seasonal factors, there could be opportunities to enter the market at lower levels if there is a correction.

Sector Allocation: BFSI is likely to remain a key driver of growth for IT companies in the coming quarters. Investors should monitor developments in this sector closely, as it represents a significant portion of industry revenue.

Market this week

Source: BSE and NSE

• Market extended its losing streak for the third consecutive week, driven by muted Q2 earnings expectations, continuous FII outflows, and ongoing Middle East tensions.
• The Nifty Auto sector experienced the largest decline, slipping nearly 5% over the week.
• The Nifty Metal index dropped by 2%, reflecting weaker performance.
• Nifty Media, FMCG, and Oil & Gas sectors each shed 1.5%, contributing to the overall market weakness.
• In contrast, the Nifty Bank index rose by nearly 2%, leading the market in gains.
• The Nifty PSU Bank index added 1%, while the Nifty Realty index recorded a modest gain of 0.6%.
• FIIs sold equities worth ₹21,823.34 crore during the week.
• DIIs bought equities worth ₹16,384 crore, helping cushion the market decline.
• For the month so far, FIIs sold ₹80,217.90 crore in equities, while DIIs purchased ₹74,176.20 crore.

Weekly Leaderboard

Source: BSE

Stocks that made the news this week:

• Tejas Networks, a manufacturer of wireline and wireless networking products, reported impressive Q2FY25 results with a seven-fold year-on-year revenue growth to ₹2,810 crore and a net profit of ₹266 crore, reversing a loss from the same period last year. On a quarterly basis, net profit surged by 250%, while revenue increased by 80%. The company posted an EBIT margin of 16.3% and ended the September quarter with an order book of ₹4,845 crore.

• Shares of Mazagon Dock surged 8% on October 18 after the company announced plans to consider a stock split and interim dividend in its board meeting on October 22. The state-run defense company has set October 30, 2024, as the record date for the interim dividend, pending board approval. Mazagon Dock stated that the board will discuss the declaration of the interim dividend and the potential sub-division or split of its equity shares.

• Shares of City Gas Distribution (CGD) companies Indraprastha Gas and Mahanagar Gas plunged by up to 14% after announcing a significant cut in priority gas allocation, reducing it from around 70% to 50%. This marks the largest single reduction in such allocations, following a decline from over 85% at the start of FY24 to 72%. Both companies expect a negative impact on profitability and are in talks with stakeholders to mitigate the effects.