Global brokerage house Nomura has turned bullish on the Indian IT sector, signaling a significant shift in sentiment. Nomura anticipates that the revenue growth rate has bottomed out, marking the end of the earnings per share downgrade cycle for the sector. This newfound optimism is reflected in Nomura’s latest recommendations and ratings upgrades across several prominent IT firms.
Among the large-cap stocks, Nomura’s top picks are Infosys, Wipro, and Tech Mahindra. In the mid-cap segment, Coforge and Birlasoft are favored. Notably, Nomura has upgraded Wipro to a Buy from Reduce, Infosys to Buy from Neutral, and HCL Technologies to Buy from Neutral. TCS has also seen its rating revised to Neutral from Reduce. These upgrades highlight Nomura’s confidence in these companies’ growth potential and recovery trajectory.
One of the key drivers behind Nomura’s bullish outlook is the expected revenue acceleration from FY26F. This positive forecast has led the brokerage to adjust its earnings projections for the IT sector, tweaking them by -3 percent to +5 percent for FY25-26F. For the first quarter of FY25 (Q1FY25), Nomura expects a mixed operating performance across its coverage universe.
Infosys is anticipated to post the strongest revenue growth among large caps at 2.5 percent quarter-on-quarter in constant currency (cc) terms. This growth is attributed to ramping large deals and eliminating a one-time impact from restructuring a BFSI client contract. HCL Tech is forecasted to experience a 2 percent decline in revenue growth QoQ in cc terms.
In the mid-cap space, Persistent is expected to show the strongest revenue growth at 5 percent QoQ in cc terms, while LTTS is projected to lag with a 2 percent decline. Despite these variations, Nomura predicts stable to improving margins across the board, except for TCS and HCL Tech. TCS is expected to be impacted by salary hikes, and HCL Tech by seasonal factors.
Infosys is expected to maintain its FY25F revenue growth guidance of 1-3 percent in cc terms. Additionally, the company’s earnings before interest and taxes (Ebit) margins are projected to expand by 80 basis points QoQ, driven by the removal of the 100 basis point impact from the BFSI contract restructuring and the elimination of visa costs. These factors are expected to contribute to a robust performance in the upcoming quarters.
Looking ahead, Nomura foresees a gradual improvement in margins for Indian IT firms, driven by the ramp-up of large deals and increased hiring in the second half of FY25F. The brokerage expects revenue growth in FY25F to be bolstered by significant cost-reduction initiatives, despite initial transition costs. After reaching peak utilization levels in the first half of FY25F, a hiring surge is anticipated in the latter half of the fiscal year.
To mitigate challenges, firms may delay and reduce salary hikes and streamline subcontractor expenses. Nomura predicts an improvement in Ebit margins by 20 to 110 basis points during FY25-26F for large caps, excluding Tech Mahindra.
The brokerage also expects a recovery from sluggish revenue growth in Q1FY25, with improvements anticipated in the following quarters. Key drivers include potential interest rate cuts in late CY24 and enhanced corporate decision-making following the US elections in November 2024. The adoption of Generative AI (GenAI) technologies is also expected to boost demand for cloud services and data standardization over the next 12-18 months.
Looking forward to FY26F, analysts forecast significant revenue growth for large-cap firms, potentially increasing from around 3 percent in FY25F to approximately 7.7 percent. This positive outlook marks a significant shift from Nomura’s previous stance. In May 2022, Nomura had a negative outlook on the IT sector due to an uncertain macroeconomic environment and deteriorating revenue growth prospects. Since then, the sector has seen a resurgence, with the index gaining over 25 percent. The index has also advanced almost 25 percent in the last year and added 5 percent in 2024 year-to-date.
