Large IT Services: Q1-25 Performance & Outlook
Macro uncertainties impacting discretionary spend in BFSI & Retail. Deal pipeline healthy. Large deals & vendor consolidation driving growth. Focus on cost, offshoring & acquisition to improve margins
Table of Contents
Overall Performance in Q1 FY25: Cautiously optimistic
The Impact of Generative AI on the Tech Industry
Demand Environment in the Tech Industry
Financial Performance of IT Services Companies
Insights for Investors in Indian IT Services
Sources
1. Overall Performance in Q1 FY25: Cautiously optimistic
Executive Summary:
The Q1 FY25 earnings season for major Indian IT services companies reveals a cautiously optimistic outlook. While macro uncertainties linger, impacting discretionary spending, particularly in BFSI and Retail, most companies reported stable to improving demand. Deal pipelines remain healthy, with large deals and vendor consolidation driving growth.
1.1 TLDR
Insights from Q1-25 performance of top 9 large IT serivces companies by market cap i.e. TCS, Infosys, HCL Technologies, Wipro, LTIMindtree, Tech Mahindra, Persistent Systems, Mphasis and L&T Technology Services
The outlook for the Indian IT services sector remains cautiously optimistic.
Growth is expected to be driven by:
Continued digital transformation initiatives
Cloud adoption
Emerging technologies like GenAI
Healthy Deal pipelines, with large deals and vendor consolidation
Companies are focusing on cost optimization, offshoring, and strategic acquisitions to enhance margins.
1.2 Muted Demand, Green Shoots Appear:
Macroeconomic pressures continue to weigh on discretionary spending, impacting client budgets and delaying decision-making.
Infosys: "My own sense is this U.S. FS is one data point. We will wait and see what some of the other data points look like." - Salil Parekh, CEO
However, signs of stabilization and early signs of recovery are emerging in certain segments.
LTIMindtree: "The clients are willing to selectively start the spend." - Ankur Rudra, CFO
Tech Mahindra: " I would say that the demand environment in BFSI is reasonably stable." - Mohit Joshi, MD & CEO
1.3 Deal Wins and Pipeline Remain Strong:
Deal pipelines remain robust, driven by large deals, vendor consolidation, and digital transformation initiatives.
TCS: "We have a good pipeline... we are quite confident in terms of engaging with our customers..." - K Krithivasan, CEO & MD
Companies are witnessing growth across multiple verticals, including BFSI (with some exceptions), Communications, and Manufacturing.
HCL Technologies: "meaningful wins are happening in this space. I believe that we have an edge over a lot of other service providers in this space." - C. Vijayakumar, CEO & MD (regarding Technology & Services vertical)
Short-cycle deals are picking up, indicating a gradual return of discretionary spending.
LTIMindtree: "the short cycle resource-based demand... flows into the order intake as we essentially close that short cycle demand and start to book revenues in the following quarter." - Sudhir Chaturvedi, President & Executive Director
1.4 Focus on Margins and Cost Optimization:
Margins remain a key focus area for all companies.
Key levers for margin improvement include:
Increased offshoring and nearshoring
Improved utilization rates
Cost optimization measures
Focus on value-based pricing
Wage hikes are anticipated in the second half of the year, potentially impacting margins.
Infosys: "...wage revisions effective November...We are evaluating, considering all the factors." - Jayesh Sanghrajka, CFO
L&T Technology Services: "For the purpose of your calculation, you can assume that these will come into effect from October." - Amit Chadha, CEO & MD
1.5 Strategic Acquisitions and Partnerships:
Acquisitions remain a key growth strategy, with companies focusing on acquiring niche capabilities and expanding their geographic reach.
Infosys: Completed acquisition of In-Tech, strengthening its cloud and digital transformation capabilities.
Persistent Systems: "We will acquire for capability, not for market" - Sandeep Kalra, CEO & Executive Director
Companies are also leveraging partnerships to strengthen their offerings and expand their market presence.
1.6 GenAI Emerges as a Growth Driver:
Generative AI is emerging as a significant opportunity, with clients exploring its potential across various use cases.
HCL Technologies: "These spends, like I am aware of one bank, which is looking at half a billion dollars outlay for GenAI programs." - C. Vijayakumar, CEO & MD
Companies are investing in building GenAI capabilities and partnering with technology providers to capitalize on this trend.
Tech Mahindra: "We started off more as a research project within our makers lab in TechM. We were very clear that we were not going to build a foundation LLM" - Mohit Joshi, MD & CEO (on developing their own Large Language Models)
1.7 Challenges and Uncertainties:
Macroeconomic Headwinds: Continued global economic uncertainty, high inflation, and geopolitical tensions pose risks to growth.
Slowdown in Discretionary Spending: Prolonged weakness in discretionary spending, especially in key verticals like BFSI, could impact revenue growth.
Talent Crunch: Attracting and retaining talent remains a challenge, particularly in a competitive market.
Wage Inflation: Upcoming wage hikes might put pressure on margins if not offset by cost-saving measures and productivity improvements.
2. The Impact of Generative AI on the Tech Industry
2.1 GenAI driving shift from human-based services to platform-based services
Companies like Persistent Systems and HCL Technologies are investing heavily in building GenAI platforms that can automate tasks and improve efficiency.
For instance, Persistent Systems developed SASVA, a generative and deterministic AI-powered digital engineering platform designed to accelerate software development.
This shift is leading to the creation of new products and services designed to help clients implement and scale GenAI solutions. HCL launched HCLTech AI Force, a generative AI and automation platform while Infosys introduced Topaz for delivering GenAI programs.
Mphasis launched Mphasis NeoZeta™, a platform for modernising legacy applications using GenAI, and Mphasis NeoCrux™, an AI-powered software development platform. They believe this approach will lead to larger deals and higher developer productivity.
2.2 GenAI creating both opportunities & challenges
Opportunities:
New revenue streams: GenAI is creating new demand for AI-related services, such as data strategy, data governance, AI model development, and AI platform implementation. For TCS, the AI and GenAI pipeline has doubled in a quarter to US$1.5 billion.
Increased productivity: GenAI can automate tasks and improve the efficiency of IT services delivery, which could lead to higher margins for IT services companies. Infosys expects GenAI will create productivity improvements of 50% in areas like DPO (Data Processing Outsourcing) and testing.
Improved customer experience: GenAI can be used to create more personalized and engaging customer experiences. For example, Tech Mahindra leveraged their network services and BPS competencies to implement a voice-based interactive system for a leading American telecom provider.
Challenges:
Pricing pressure: Clients are expecting to share in the productivity gains from GenAI, which could lead to pricing pressure on IT services. TCS acknowledges discussions with clients about using GenAI to lower costs and improve cycle time, while Infosys highlights the need to share benefits with clients while ensuring profitability.
Talent reskilling: IT services companies need to reskill their workforce to meet the growing demand for GenAI skills. HCL aims to train 50,000 employees in GenAI and AI skills, while Infosys has trained 250,000 employees in GenAI.
Managing customer expectations: There is a lot of hype around GenAI, and IT services companies need to manage customer expectations about what is possible with the technology.
2.3 The impact of GenAI on IT services spending is still uncertain.
Some experts believe that GenAI will lead to an overall increase in IT services spending as companies invest in AI-related projects.
Others believe that GenAI could lead to a decrease in IT services spending as companies use AI to automate tasks and reduce their reliance on human workers.
The sources reflect this uncertainty, with some companies expressing optimism about the growth potential of GenAI while others are more cautious.
2.4 Companies are already seeing real-world results from GenAI implementations.
HCL Technologies highlighted a case study where a global technology major implemented a GenAI-based solution for gaming review analysis, resulting in a 119% increase in game reviews.
Infosys discussed using GenAI to improve credit risk analysis for a banking client, enabling better decision-making and faster processing times.
Persistent Systems shared how they used GenAI to document legacy code and build a modern interface for a US-based insurance provider, showcasing its potential in modernising legacy systems.
3. Demand Environment in the Tech Industry
Overall, the demand environment is characterized by a degree of duality. Companies are seeing increased demand for services related to cost optimization, automation, and cloud migration, but discretionary spending on large-scale transformation projects remains subdued. This suggests that while companies are willing to invest in initiatives that promise immediate cost savings and efficiency gains, they are hesitant to commit to large, long-term projects given the uncertain economic outlook.
Several factors contribute to this cautiousness. High interest rates, inflation, and geopolitical instability are creating economic headwinds that are making companies more risk-averse. Clients are prioritizing cost takeout and efficiency initiatives over large-scale technology transformation projects.
However, there are pockets of growth and optimism. The sources point to a few key trends:
Financial services in the US show signs of improvement. Infosys noted early signs of recovery in this sector, attributing it to a renewed focus on efficiency and the adoption of Generative AI. Wipro also reported an uptick in its BFSI business in the US, driven by its subsidiary Capco. Tech Mahindra highlighted a significant deal win with a large global bank, indicating a willingness among some financial institutions to undertake large-scale technology projects.
Demand for Generative AI (GenAI) is growing rapidly. Companies across industries are exploring how GenAI can help them improve efficiency, automate tasks, and create new products and services. This is creating new opportunities for IT services companies to provide consulting, implementation, and support services related to GenAI.
Cloud migration and modernization continue to drive demand. As companies seek to become more agile and data-driven, they are increasingly turning to the cloud. This is creating opportunities for IT services companies to provide cloud migration, modernization, and management services.
Despite these bright spots, the demand environment remains difficult to predict. The sources indicate that deal cycles are becoming longer as clients take a more cautious approach to decision-making. IT services companies are closely monitoring the situation and adjusting their strategies accordingly.
4. Financial Performance of IT Services Companies
4.1 Revenue Growth:
Infosys stood out with a strong sequential revenue growth of 3.6% in constant currency terms, driven by a resurgence in their Financial Services segment, large deal wins, and the completion of their in-tech acquisition. This strong performance led them to upgrade their full-year revenue growth guidance to 3-4%.
HCL Technologies also saw a 5.6% year-on-year growth in constant currency, exceeding their initial expectations, but acknowledged that Q1 is typically a soft quarter for them.
LTIMindtree had revenue in line with expectations, with their CEO stating that fiscal year 2025 started as anticipated.
Persistent Systems achieved a healthy 16% year-on-year revenue growth in USD terms, fueled by a strong performance in their Healthcare and Life Sciences vertical.
TCS reported a 4.4% year-on-year growth in constant currency terms, with all their markets returning to sequential growth.
Tech Mahindra faced a year-on-year decline of 1.2% in constant currency but saw sequential growth of 70 basis points.
Wipro experienced a 1% decline in constant currency, remaining within their guided range but acknowledging a challenging business climate.
4.2 Profitability and Margins:
Infosys expanded its operating margin by 1% sequentially to reach 21.4%, benefiting from improved utilization, a favorable onsite-offshore mix, and cost optimization initiatives under their Project Maximus program.
HCL Technologies saw their operating margins decrease 50 basis points sequentially to 17.1% due to wage hikes but remained comfortable with their full-year margin guidance of 18-19%.
LTIMindtree aims for an EBIT margin of 16% in FY25, a goal they believe is achievable through their ongoing focus on operational efficiency.
Mphasis reported an EBIT margin of 15%, with their Silverline acquisition impacting the margin by 0.8%. They remain committed to managing profitability while investing for growth.
Persistent Systems saw their EBIT margin increase to 14%, a 10.8% improvement year-on-year, and aim to maintain their previous year's EBIT margin of approximately 14.5%.
TCS maintained a healthy operating margin of 24.7%, a decrease of 130 basis points sequentially due to annual wage hikes.
Tech Mahindra expanded their operating margin to 8.5%, an 110 basis point improvement compared to the previous quarter, attributing this to cost-saving initiatives under their Project Fortius program.
Wipro reported an IT services margin of 16.5%, an improvement of 0.4% year-on-year and 0.1% sequentially.
4.3 Deal Wins and Pipeline:
Infosys secured 34 large deals with a total contract value of US$4.1 billion in Q1, a record for the company, and their deal pipeline continues to remain strong.
HCL Technologies mentioned securing a couple of big wins in financial services, expected to contribute to incremental revenue in the latter half of the fiscal year.
LTIMindtree closed deals with two clients at US$30 million, two at US$15 million, and three deals with a total contract value of US$10 million, and emphasized the securing of a significant empanelment.
Mphasis reported a substantial increase in their Total Contract Value (TCV) closures, reaching US$319 million, driven by their Savings Led Transformation™ thesis that aims to unlock large modernization deals.
Persistent Systems secured a total contract value of US$462.8 million for the quarter.
TCS reported a strong order book at US$8.3 billion for the quarter, indicating continued demand for their services.
Tech Mahindra secured US$534 million in deal wins, a 6.8% increase quarter-on-quarter and year-on-year, and emphasized these wins' alignment with their strategic focus on the US and European markets.
Wipro secured a large telecommunications deal but didn't disclose the exact value.
5. Insights for Investors in Indian IT Services
5.1 Exercise Cautious Optimism:
The overall sentiment is one of cautious optimism. While the current global economic uncertainty and cautious client spending are recognized as ongoing challenges, the companies express confidence in their ability to navigate these complexities and capitalize on emerging opportunities.
Focus on companies demonstrating resilience. Look for companies that are successfully managing profitability through cost optimization measures, operational efficiencies, and strategic pricing. The sources highlight Infosys, HCL Technologies, LTIMindtree, Mphasis, Persistent Systems, TCS, Tech Mahindra, and Wipro as companies actively engaging in these practices.
Pay close attention to deal wins and pipeline strength. Robust deal signings, particularly for large, strategic projects, indicate future revenue streams and a company's competitiveness. Companies like Infosys, HCL Technologies, LTIMindtree, Mphasis, Persistent Systems, TCS, Tech Mahindra, and Wipro all highlighted significant deal wins in their respective earnings calls.
5.2 Recognize Growth Drivers:
Generative AI (GenAI) is a significant growth driver. Companies across industries are increasingly interested in GenAI's potential to enhance efficiency, automate processes, and drive innovation. Investors should consider companies actively investing in GenAI capabilities and securing GenAI-related projects. The sources identify Infosys, LTIMindtree, TCS, HCL Technologies, and Persistent Systems as companies actively engaging in the GenAI space.
Cloud migration and modernization remain key growth areas. As businesses prioritize agility and data-driven strategies, cloud adoption continues to rise. Companies with proven cloud expertise and a strong track record in cloud migration and modernization services are well-positioned.
Specific verticals offer pockets of growth. While overall client spending remains cautious, the US Financial Services sector shows signs of recovery and increased IT spending. Companies with strong capabilities and a solid presence in this vertical are likely to benefit. Infosys, Wipro (through its Capco subsidiary), and Tech Mahindra all highlighted positive momentum in this sector.
5.3 Monitor Key Factors:
Pay attention to management commentary and guidance. While specific financial projections are often limited, management's assessment of the demand environment, growth drivers, and strategic initiatives provides valuable context for investors.
Monitor macroeconomic factors closely. Interest rates, inflation, geopolitical developments, and potential regulatory changes in key markets can all impact IT spending.
Consider a long-term investment horizon. The IT services sector is cyclical, and short-term fluctuations are to be expected. Companies with a clear strategic vision, a commitment to innovation, and a strong track record of adapting to changing market dynamics are more likely to deliver sustainable long-term value.
6. Sources
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