IT sector is expected to post a weak quarter: Report

New Delhi: The IT sector is expected to post a weak quarter with a sequential decline, HDFC Securities said in a report.

This is due to increased furloughs, Q3 seasonality, a prolonged deal conversion cycle, and compression in discretionary and renewals.

Positive factors for the quarter include the ramp-up of mega deals (BSNL/Verizon for TCS/HCLT) and consistent deal activity.

However, most of the supply-side indicators, such as tech job postings, remain soft and do not signal any recovery ‘yet’. Although the recent trajectory of rates can support valuation multiples (high inverse correlation), it’s unlikely that tech budgets will improve materially, the report said.

This is because a ‘slowdown’ in economic growth remains a baseline scenario, leading enterprises to prioritise cost optimisation over transformation initiatives.

“In the Indian IT landscape, we expect three developments: (1) growth divergence within the sector in the near term, (2) margin recovery with favourable supply-side factors, and (3) mid-tier IT sustaining its relative outperformance,” the report said.

Elara Securities said in a report that earnings for IT may decline 3 per cent YoY as furloughs weigh down on operating margins. IT may face a challenging quarter, with furloughs weighing on operating margins in an already-weak quarter. Expect the disconnect between revenue growth and deal wins to continue.