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Preview to Q2FY25 Technology Industry Financial Results: Key Insights
Preview to Q2FY25 Technology Industry Financial Results: Key Insights

October 10, 2024

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As the Q2FY25 results for tech companies draws near, we take a closer look at the key expectations, challenges, and opportunities shaping the technology sector. In the latest edition of "Analyst Assemble" by Nasscom Insights, Apurva Prasad, Vice President at HDFC Securities, shared his insights on what to anticipate this quarter and how the industry is navigating current trends.

Headwinds

  • Labor Market Weakness: Labor market data has weakened, indicating potential macroeconomic slowdown, adding to ongoing challenges.
  • Cost Optimization: Enterprises are prioritizing cost optimization and margin enhancement over new spending, limiting tech budgets.
  • Geopolitical Volatility: Ongoing geopolitical uncertainties could escalate, posing risks to the tech sector’s growth.

Tailwinds

  • Currency Stability: The USD-INR exchange rate has remained stable, and low volatility supports margins, especially for companies with significant exposure to cross-currencies.
  • Tech Stack Upgrades & AI: Investments in upgrading the tech stack, reducing technical debt, and AI integration, particularly in the banking sector, are driving growth.
  • Generative AI: Generative AI continues to be a big focus, with companies investing in infrastructure such as GPUs and data centers, which will fuel future growth.
  • Cybersecurity & Compliance: Regulatory compliance and cybersecurity spending are steadily increasing, providing a growth tailwind for the sector.

Verticals and Segments

  • BFSI: The BFSI sector is seeing faster decision-making and approvals, especially in areas like capital markets, cards and payments, and mortgages, leading to improved performance.
  • Transportation & communication: Transportation continues to be high. Discretionary spend in communications expected to pick up in the near term.
  • ER&D: Affected by slowdown in the EV side. However certain pockets specifically in OEMS doing well.
    • Increase in partnerships  and alliances within OEMs to optimize software development costs will be a positive.          

Deal Wins

  • Mega Deals Decline: While the number of mega deals has decreased compared to a year ago, smaller deals and faster deal-to-revenue conversion are helping maintain growth.
  • Public Sector Deals in the U.S.: Strong deal activity is noted in the public services segment, which contributes positively, although mega deals have come down.

 

Wage Inflation & Attrition Eases

Optimized Cost Structures

Hiring Gradually Improving

  • Wage inflation has normalized in the US, reducing pressure on margins. Attrition rates are also lower than pre-pandemic levels.
  • Companies have optimized cost structures through reduced subcontracting and improved pyramid structures, which could help increase margins as demand returns.

 

  • Companies are increasing hiring, particularly at the fresher level, building benches to meet future demand.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues & Margins

  • Growth Outlook: Sector growth for Q2FY25 is expected to improve annually and sequentially.
  • Mid-Tier Companies: Mid-tier companies are facing margin-related challenges, partly due to wage hikes and the impact on ER&D.

Things to watch out for

  • Impact of generative AI and how that convert to revenues, specially for Indian players who have announced a pipeline
  • How are the service providers dealing with GCC as competition versus partnering with them
  • Geopolitical and macro related factors

 

These factors provide a balanced view of the challenges and opportunities shaping the tech sector in Q2FY25, setting the stage for a more normalized growth trajectory in the coming quarters.


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Prajwal Pandey
Research Analyst

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