IT sector: Subdued Q2, but cost control strategies offer silver lining

The IT sector reported a subdued performance in the September quarter (Q2 FY24) although this was somewhat expected, according to a Kotak Institutional Equities report. The outcomes were crucial in providing insights for FY25. While there were notable large contract announcements that improved outlook, they were counterbalanced by declining discretionary expenditures.

Fortunately, there's been a heightened emphasis on cost management, which has aided in margin growth and shielded earnings from revenue challenges. "We perceive that the risk-to-reward ratio in the industry is balanced, with Infosys, HCLT, and Cyient showing promise," said the report.

There was an unexpected increase in margins, highlighting prudent strategies to navigate challenging periods. EBIT margins for TCS, Infosys, and HCLT rose between 40-150 bps and exceeded Kotak's predictions by 40-90 bps.

"In contrast to their stance at the start of the year, where there were expectations of a delayed recovery, companies are now more proactive in cost containment. As the hoped-for swift turnaround hasn't come to fruition, expenses are being adjusted to match the actual market demand, said the report.

Read the Kotak Institutional Equities report here.