IT companies' margins may drop in Q3 FY25, but favourable currency movements may benefit: SBI Securities

New Delhi [India], December 5 : Margins for some Indian IT companies are likely to decline in the third quarter of FY25 due to seasonal and structural factors, according to a report by SBI Securities.
The report also highlighted that the third quarter is typically weak for IT companies because of fewer working days and furloughs, which impact operations. Additionally, wage hikes are expected to further weigh on the margins of select companies.
It said "3QFY25 is expected to be seasonally weak due to lower number of working days and furloughs. The margin for few companies may see sequential drop owing to wage hike impact".
Despite the anticipated challenges, IT companies remain cautious about growth prospects. Key concerns include policy uncertainties under the new U.S. government, client-specific issues, and geopolitical tensions. Even with the beginning of interest rate reversals in key global markets, these headwinds continue to impact the sector.
On a brighter note, the report also emphasized positive factors that could benefit IT companies in the medium term. These include favourable currency movements, a robust deal pipeline, lower attrition rates, early signs of recovery in discretionary spending, particularly in the BFSI (banking, financial services, and insurance) sector, and higher capacity utilization.
It said "On a positive side, currency tailwind, strong deal pipeline, lower attrition, early signs of recovery in discretionary spending especially in BFSI and higher capacity utilization are the key positive triggers in medium term".
The IT sector has shown encouraging trends in the second quarter with most companies reporting growth in revenue, EBIT, and PAT on both year-on-year and quarter-on-quarter bases.
The growth was broad-based across industries and geographies, led by a recovery in BFSI, the largest revenue-contributing vertical.
Furthermore, EBIT margins improved year-on-year, supported by offshoring, converting bench employees into billable roles, delayed wage hikes, and lower attrition rates.
The report also noted increased hiring activity within the sector as capacity utilization reached optimal levels of 85-86 per cent.
It also noted that the Mid-cap IT companies are expected to outperform their larger peers while emerging technologies such as generative AI, cybersecurity, cloud migration, IoT, and data security are likely to be the key growth drivers for the sector.
It said "Midcap IT players are likely to relatively outperform Tier 1 peers".
However, for the full year growth the report stated that the most IT companies have expressed optimism about achieving higher growth in FY25 compared to FY24, signalling a cautiously positive outlook for the industry despite near-term challenges.