AI, Deal Wins, and Discretionary Spending: Key Takeaways from India’s IT Q3FY25

The October-December quarter of FY25 (Q3FY25) presented a mixed performance for India’s leading IT companies—Infosys, Tata Consultancy Services (TCS), Wipro, HCL Technologies, and Tech Mahindra. While some firms showcased resilience with revenue growth and margin expansion, others faced hurdles due to global economic volatility and shifts in discretionary spending. This article examines the quarterly results, the challenges and opportunities ahead, and what these earnings signal for the sector’s future.

Q3FY25 Performance Overview

Tata Consultancy Services (TCS)

TCS emerged as the leader in deal wins, securing contracts worth over $10 billion, marking a significant improvement from previous quarters. The company also reported the highest EBIT margin among its peers at 24.5%. While revenue growth remained flat, TCS’s strong client engagement and improving discretionary spending trends, especially in the BFSI and telecom sectors, provide a solid foundation for future growth.

Infosys

Infosys delivered 1.7% revenue growth, but a substantial portion of this came from non-recurring pass-through elements, raising concerns over the sustainability of its revenue trajectory. The company reported a rise in attrition to 13.7% and witnessed cautious discretionary spending. However, strong deal wins in enterprise AI and digital transformation projects indicate long-term growth potential.

Wipro

Wipro surprised analysts by posting positive revenue growth despite weak discretionary spending and seasonal furloughs. The company expanded its operating margin to 17.5%, the highest in three years, driven by cost optimization and operational efficiencies. However, a declining client base and exposure to the strengthening US dollar remain concerns.

HCL Technologies

HCL Tech reported strong growth of 3.8% in revenue and raised its lower-end revenue guidance for the fiscal year. The company saw a steady rise in deal wins, amounting to $2.1 billion, and continued expanding its workforce, signaling confidence in future demand. Its focus on AI-led propositions and digital transformation offers a promising outlook.

Tech Mahindra

Tech Mahindra posted an impressive 92.6% year-on-year rise in net profit, primarily due to strong deal wins and disciplined cost management. However, sequentially, net profit declined due to the absence of a one-time gain from asset sales. The company remains optimistic about long-term growth, backed by expansion in operating margins and strategic investments in key verticals.

Challenges Facing the IT Sector

1. Global Macroeconomic Uncertainty: Persistent economic headwinds in North America and Europe, key markets for Indian IT firms, have impacted client spending and delayed deal closures.
2. Weak Discretionary Spending: Despite some improvements, discretionary IT spending remains lower than expected, particularly in BFSI and retail sectors.
3. Rising Attrition and Workforce Adjustments: Companies like Infosys and TCS reported increasing attrition rates, while others, such as Wipro, witnessed a reduction in headcount.
4. Currency Fluctuations: A stronger US dollar has offset revenue gains from European markets, affecting overall financial performance.

Opportunities for Growth

1. AI and Digital Transformation: Companies investing in generative AI, cloud computing, and digital transformation are witnessing strong demand and long-term deal wins.
2. Cost-Takeout Deals: Clients are increasingly focusing on cost optimization, leading to opportunities in automation and efficiency-driven projects.
3. BFSI and Telecom Revival: Sectors like BFSI and telecom are showing early signs of discretionary spending recovery, which could boost IT demand.
4. Improving Operational Margins: Several companies have demonstrated margin expansion despite wage hikes, indicating better cost management and operational efficiency.

Future Outlook of the IT Sector

Despite near-term challenges, the overall outlook for India’s IT sector remains positive. The increasing adoption of AI-driven solutions, strong deal pipelines, and improving discretionary spending trends suggest a steady recovery. While Q4FY25 may see some headwinds, particularly for Infosys, long-term prospects appear robust, with companies like TCS and HCL Tech well-positioned for sustained growth.

As businesses continue to invest in digital transformation and AI capabilities, Indian IT firms stand to benefit from these emerging trends. The focus will be on execution, client engagement, and strategic investments to drive long-term value creation in a competitive global landscape

Market this week

Source: BSE and NSE

• The Indian equity market saw continued profit booking for the second consecutive week, driven by persistent FII selling, mixed global market trends, and concerns over a depreciating rupee, rising dollar, and climbing crude oil prices.
• The Nifty Information Technology index dropped nearly 6%, while Nifty Realty fell 2.5%, and Nifty Healthcare, Media, and FMCG indices each declined by over 2%.
• On the other hand, Nifty PSU Bank and Metal indices rose by 3% each, showing resilience in those sectors.
• Foreign Institutional Investors (FIIs) sold equities worth Rs 25,218.60 crore during the week, while Domestic Institutional Investors (DIIs) bought equities worth Rs 25,151.27 crore.
• So far in the month, FIIs have offloaded equities worth Rs 46,576.06 crore, while DIIs have made purchases amounting to Rs 49,367.14 crore

Weekly Leaderboard

Source: BSE

Stocks that made the news this week:

• Fertilizer and chemical stocks surged by nearly 10% on January 17, driven by a jump in soda ash prices. Companies like Gujarat Heavy Chemicals and Gujarat State Fertilizers & Chemicals saw significant gains, benefiting from the recovery in soda ash prices, which had fallen over 30% in the past year. As soda ash is a key raw material for industries like glass and detergents, its price increase is expected to boost revenues and profit margins for producers.

• Reliance Industries Ltd (RIL) gained over 4% as brokerages raised their target prices following strong Q3 performance across key segments, particularly retail, which saw a 9.1% YoY EBITDA increase. The O2C and E&P segments also performed well, but the telecom segment lagged due to slower-than-expected benefits from tariff hikes. Despite this, RIL’s consolidated EBITDA grew 17% YoY, beating estimates, with strong growth in organized retail and B2C grocery revenue.

• CLSA upgraded Indus Towers Ltd. to its ‘high conviction’ list, signaling increased bullishness on the stock. The brokerage set a target price of Rs 575 per share, implying a 62% upside from the previous session’s close, reflecting strong confidence in the telecom player’s future prospects..