While margins may remain under some pressure due to the impact of full-quarter wage increases, the focus is expected to shift to the deal pipeline. Historically, the second half of the fiscal year often sees more contract renewals and new customer decision-making. “If you look at the third and fourth quarters, generally most of the deals are being renewed and most of the customers are making decisions when it comes to new deals. So you will see seasonally strong TCVs as far as TCS and most other major IT packages are concerned,” Nayak said in an interview with ET Now.
When ramping up customers, discretionary spending remains selective rather than broad-based. According to Nayak, the visible recovery remains largely limited to specific sectors. “Basic discussions and channel checks with the companies, what we understand is whatever discretionary expenditure comes back, it is mainly high-tech and BFSI to some extent. As far as TCS is concerned, the increases, if they happen, would be mainly on the BSNL account.”
Meanwhile, HCL Tech continues to stand out as an outperformer within the large IT universe. The company had previously indicated that certain deals had shifted to the right, paving the way for a stronger second half. This trend is expected to continue in the third quarter, aided by the seasonally strong HCL Software business. “We may expect constant currency growth of somewhere around 2% for the business,” Nayak said, warning that margins could come under pressure due to wage hikes and restructuring costs.
Despite short-term headwinds, confidence in HCL Tech’s relative performance remains intact. “HCL Tech has always outpaced the industry and we believe this will continue to be the case this quarter as well,” Nayak said. He added that LTIMindtree is likely to remain the fastest growing among the major players, with the fourth quarter expected to be stronger than the third quarter due to deal expansion.
Beyond the headlines, markets are expected to closely monitor commentary around AI, cloud and deal execution. While AI revenues have been a topic of conversation, the way companies disclose them may evolve. Nayak highlighted that while HCL Tech had earlier quantified AI revenues at around 3% of sales, global peers are rethinking such revelations. “Accenture has always made those Gen-AI revenues public… but what Accenture is doing now is they will not disclose their Gen-AI revenues going forward because they have said that Gen-AI is built into every deal that they are doing now.” This, he said, is likely to apply to Indian IT companies as well, as AI becomes embedded across services rather than remaining a standalone revenue line. Currency movements are another variable in focus this quarter. The rupee’s depreciation of almost 2% from the previous quarter is expected to provide some support, especially for companies with higher exposure to the US. “Generally speaking, every 100 basis points depreciation of the rupee results in a positive impact of 30 to 40 basis points in terms of margins,” Nayak explains. However, this advantage could be largely offset by wage increases across both large and mid-cap players, limiting the scope for any meaningful margin expansion.
Overall, the third quarter IT earnings season will be one of resilience rather than acceleration. Steady revenues, cautious margins and deal momentum, AI integration and management commentary are likely to drive more stock-specific reactions than actual growth rates.
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