Tuesday 17 / September / 2024
New Delhi: The Indian IT sector is poised for strong earnings growth in the coming years, with a projected double-digit Earnings Per Share (EPS) Compound Annual Growth Rate (CAGR) of 17.5 per cent from FY24 to FY27, according to recent industry analysis report by Nirmal Bang Equities.
The report highlighted that this growth is expected to be driven by several key factors, including significant deal wins, stabilizing margins, and sustained demand for Digital Transformation (DT) services, particularly in cloud computing, cybersecurity, and Generative AI (GenAI).
"We anticipate a robust double-digit EPS growth (17.5 per cent CAGR) from FY24 to FY27E," the report said.
As of the first quarter of FY25, the report noted that the total deal wins for the sector stood at approximately USD 100.7 billion, marking a 16.6 per cent year-on-year increase, despite broader market downturns.
The report stated that this momentum, combined with expanding medium- to long-term opportunities in digital transformation, is expected to bolster sector performance over the next three years.
The sector's ability to enhance client operations across various industries, coupled with potential positive shifts in consumer sentiment from anticipated U.S. Federal Reserve rate cuts, could further unlock client spending, driving growth.
In terms of revenue, the report noted that the Nifty IT index is projected to grow at a CAGR of 8.5 per cent over FY24-27, slightly outperforming the market's estimated USD CAGR of around 8 per cent.
However, this rate is expected to be lower than the 11 per cent CAGR achieved between FY21-24, which was characterised by a sharp increase in discretionary spending. During this period, EPS growth lagged at 13 per cent, largely due to elevated employee and subcontractor costs stemming from demand-supply imbalances in the labor market.
"We project the Nifty IT index revenue growth at a CAGR of 8.5 per cent over FY24-27E, slightly above the market's estimated approx. 8 per cent USD CAGR, but below the approx. 11 per cent CAGR of FY21-24, which was marked by a sharp rise in discretionary spending," the report added.
Looking ahead, the report noted that the IT sector is expected to see faster EPS growth, supported by several margin expansion initiatives, including pyramid rationalisation, reduced subcontractor expenses, higher utilisation rates, and organisational restructuring.
Notably, CEO replacements in six out of the 11 companies covered under the report analysis are expected to bring fresh strategic perspectives, potentially driving improved performance.
The report also added that GenAI is also expected to play a crucial role in this growth and is poised to drive the next phase of growth in digital transformation deals.
