Tier-2 tech companies to continue to outpace tier-1 firms in growth during 3QFY25: Report
A more measured hiring approach in light of only gradual improvements in demand, and a strong USD vs. INR should provide margin cushion in FY26.
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After a decent 2Q, Motilal Oswal expects a seasonal furloughs to weigh on growth for the technology sector in 3QFY25. That said, looking beyond seasonality, macro uncertainty is gradually easing and the outlook for technology spending is expected to improve in CY25. While the initial phase of recovery in 1HFY25 was sluggish, there are clear signs of an acceleration.
It is predicted that tier-2 companies will continue to outpace tier-1 firms in growth during the quarter. The most important catalyst for the sector now would come after 3QFY25, when client budgets for CY25 would be finalized and the magnitude of change in client behavior would become clearer.
Furloughs and wage hikes to put pressure on margins in 3Q
Margin declines for INFO (seasonally weak 2H and furloughs) and LTIM (wage hike) are expected. That said, growth leverage in 2H for select companies (COFORGE/LTTS/CYL) and cost optimization benefits could help offset some of this impact. A more measured hiring approach in light of only gradual improvements in demand, and a strong USD vs. INR should provide margin cushion in FY26.
Among Tier-I players, LTIM is recommended by Motilal Oswal as its vertical exposures in BFSI and Hi-tech, as well as its service line exposures in data, ERP and modernization, position it well for a recovery in client spends in FY26/FY27.
As per Motilal Oswal, INFO and TCS will report 1.0% and 0.4% cc QoQ growth, respectively, whereas HCLT is anticipated to clock healthy growth of 3.7% in 3QFY25, driven by seasonality in its software business. Meanwhile, TECHM is likely to post flat revenue QoQ and Wipro may report a 1.0% decline QoQ. LTIM could report 1.5% QoQ cc growth as furloughs may slightly temper its performance.
EBIT margins for TCS is expected to improve by 40bp QoQ, largely due to investment made in talent development and training, operational efficiency and absence of wage hikes. HCLT’s margins may rise ~50bp due to operating leverage and a strong software quarter, despite a wage hike impact and furloughs. For Infosys, it is anticipated that margins will decline by 30bp owing to furloughs and lower working days, offset by pricing gains, subcontractor cost optimization, and Project Maximus.
LTIM’s margins are expected to decline sequentially by 210bp due to wage hikes, partly offset by operational efficiencies. Wipro may see a decline of 40bp. The net headcount addition would be lower across the booard, owing to lower working days, coupled with a gradual demand recovery.
