The Indian IT sector is on track for substantial earnings growth in the coming years, with a forecasted double-digit Earnings Per Share (EPS) Compound Annual Growth Rate (CAGR) of 17.5 percent from FY24 to FY27, as per a recent report by Nirmal Bang Equities. This growth is set to be fueled by factors such as significant deal wins, stable margins, and sustained demand for Digital Transformation (DT) services, especially in areas like cloud computing, cybersecurity, and Generative AI (GenAI).
Despite broader market downturns, the total deal wins for the sector reached approximately USD 100.7 billion in the first quarter of FY25, reflecting a 16.6 percent year-on-year increase. The report emphasized that this momentum, coupled with expanding digital transformation opportunities in the medium- to long-term, is expected to boost sector performance in the next three years. The IT sector’s capacity to enhance client operations across varied industries and potential positive shifts in consumer sentiment due to anticipated U.S. Federal Reserve rate cuts could also lead to increased client spending and growth.
In terms of revenue projections, the Nifty IT index is estimated to grow at a CAGR of 8.5 percent over FY24-27, slightly surpassing the market’s expected USD CAGR of around 8 percent. Nevertheless, this growth rate is anticipated to be lower compared to the 11 percent CAGR achieved between FY21-24, mainly due to heightened employee and subcontractor costs resulting from labor market demand-supply imbalances. The report indicated that during this period, EPS growth was at 13 percent.
Looking ahead, the report highlighted that margin expansion initiatives such as pyramid rationalization, decreased subcontractor expenses, higher utilization rates, and organizational restructuring are likely to support faster EPS growth in the IT sector. With CEO replacements in six out of the 11 companies covered in the report, fresh strategic perspectives are expected to drive enhanced performance. Additionally, the report pointed out that GenAI is anticipated to play a pivotal role in driving the next phase of growth in digital transformation deals.
In conclusion, the Indian IT sector is positioned for substantial earnings growth in the years to come, driven by key factors like strong deal wins, stable margins, and growing demand for digital transformation services. Despite challenges such as labor market imbalances impacting costs and revenue growth, margin expansion initiatives and new leadership perspectives are set to support increased EPS growth. GenAI also plays a crucial role in the sector’s growth trajectory, with its potential to drive digital transformation deals in the future. Overall, the outlook for the Indian IT sector remains positive, with expectations of continued growth and performance improvement.
