The Indian IT sector is set for muted growth in the March quarter due to geopolitical tensions and AI anxiety, a Nuvama report suggests. Tier-2 companies are expected to outperform Tier-1 firms, with overall growth ranging from -1.7% to 4.7%.
The Indian Information Technology sector is expected to post muted growth in the March quarter on a sequential basis owing to the ongoing geopolitical tensions in West Asia and the anxiety triggered due to the introduction of generative AI in the industry, according to Nuvama Institutional Equities. US tariffs are likely to put added pressure on IT companies during the reporting quarter.
Tier-2 Companies to Outperform
The modest performance of the IT sector will largely be in line with the brokerage's expectations. Earnings growth of Tier -1 companies are likely to be beaten down by the Tier-2 companies as they continue to outperform.
The brokerage expects the companies under its coverage universe to be likely to report growth in the range of -1.7 per cent to 4.7 per cent on a quarter-on-quarter basis.
Company-Specific Projections
"Within Tier-1 companies, TCS (+1.2% CC QoQ) is likely to report decent growth, followed by Wipro (+0.5% CC QoQ) and TechM (+0% CC QoQ). Infosys (-0.8% CC QoQ) and HCLT (-1.6% CC QoQ) are expected to report QoQ decline due to seasonal factors," Nuvama noted in its report.
The continued outperformance by the Tier-2 companies is likely to be led by Persistent, MPhasis, Coforge and LTI Mindtree, growing 4 to 1.5 per cent on constant currency terms.
Margins and Currency Impact
Despite the global trade disruptions due to gulf war, margins are likely to remain intact for the Indian IT companies, mainly supported by a sharp rupee depreciation. The rupee has fallen nearly 5% since the beginning of the war in West Asia. The report depicts the rupee falling further if the Gulf War persists.
Deal Flow and Outlook
Talking about the order flows, the brokerage expects decent deal flows despite a volatile demand environment, with cost-takeout deals accounting for a bulk of incremental wins. "Margins are likely to be volatile across a few companies--affected by wage hikes and restructuring costs, partly offset by operating leverage and currency tailwinds," the brokerage said.
Long-Term 'Buy' Rating
Nuvama has a 'buy' rating on the top ten IT services companies as it expects the stocks to perform well in the long and medium term, as the stocks saw a sharp correction in recent times. The brokerage added that the near term volatility is likely to persist. (ANI)
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