Motilal Oswal forecasts tier-2 tech companies will outpace tier-1 firms in growth during 3QFY25 despite seasonal furloughs impacting the sector. Improved technology spending is expected in CY25, influenced by upcoming client budget finalizations. However, challenges such as wage hikes and furloughs may pressure margins for key players. LTIM is highlighted for its strong market position, with varied growth expectations across firms.
Motilal Oswal projects that tier-2 technology firms will continue to outperform their tier-1 counterparts in growth during the third quarter of FY25, despite seasonal furloughs anticipated to impact overall sector growth. Positive signs are emerging beyond these seasonal factors as macroeconomic uncertainties subside and technology spending is set to improve in the upcoming calendar year.
The expected growth surge is anticipated post-3QFY25 when client budgets for the following year are finalized, which will clarify shifts in client behavior and spending patterns. Although challenges such as furloughs and wage hikes may pressure profit margins for firms like Infosys (INFO) and LTIM, there will be growth opportunities for select companies like COFORGE, LTTS, and CYL, aided by cost optimization.
Motilal Oswal recommends LTIM among tier-1 players due to its strong positioning in the BFSI and Hi-tech sectors, as well as its service lines in data management, ERP, and modernization, positioning it favorably for FY26 and FY27 recovery. Expected growth rates for tier-1 companies in 3QFY25 include 1.0% for Infosys, 0.4% for TCS, and 3.7% for HCL Technologies, while TECHM may report flat revenue and Wipro a slight decline.
TCS is projected to see a 40 basis points (bp) increase in EBIT margins owing to investments in talent development and operational efficiencies, alongside stable wage conditions. HCL Technologies’ margins may improve by approximately 50bp driven by strong software performance, notwithstanding wage hikes. However, Infosys anticipates a 30bp decline in margins due to fewer working days and furloughs, although offset by pricing strategies.
LTIM may witness a 210bp sequential margin decline from wage hikes, partially balanced by operational efficiencies, while Wipro expects a 40bp decrease. Overall, net headcount growth will be subdued due to reduced working days, coinciding with a gradual recovery in demand during the quarter.
The technology sector has displayed a mixed performance recently, with tier-2 companies showing resilience and greater growth potential compared to tier-1 firms. A seasonal slowdown due to furloughs and macroeconomic uncertainties have posed challenges, yet the overall outlook appears optimistic as technology spending is poised for an upswing in FY26. This context sets the stage for examining firm-specific growth and margin forecasts within the industry.
In summary, tier-2 technology firms are projected to continue their growth lead over tier-1 firms in 3QFY25, amidst anticipated seasonal challenges. While margin pressures from furloughs and wage hikes are expected, select companies may leverage cost optimization for better resilience. The completion of client budget approvals post-3QFY25 will likely yield more clarity on future spending, reinforcing prospects for tier-2 companies in the evolving market landscape.
Original Source: www.storyboard18.com
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