Lookback: How Indian IT Services Walked Out of the Discretionary-Spend Winter, 2023-06 to 2024-12

Eighteen months of pain, denial, repositioning, and one quiet rerating. By the time December 2024 arrived, the IT pack had completed a textbook sector cycle, and almost nobody on the Street was bearish anymore.

The Indian IT services trade going into June 2023 was a position nobody on the desk wanted to defend at a dinner party. Nifty IT had bled through most of FY23, the BFSI vertical, which fed roughly a third of large-cap revenue, was in open retrenchment in the United States after the regional banking wobble of March 2023, and the GenAI narrative had begun to mutate from "co-pilot tailwind" into "billable-hour destruction." TCS had just installed K Krithivasan as managing director on 1 June 2023, replacing Rajesh Gopinathan in a transition that felt less like a coronation and more like a hand-off into bad weather. Infosys was weeks away from the most damaging guidance cut in its recent history. Wipro was already in the basement of the league table.

I remember the buy-side reads from that week. The base case was "dead money for two quarters." The bear case was "GenAI is the cloud-of-2010 moment except in reverse." Almost nobody was running the bull case, which was simply this: that the cycle was already late, that deal pipelines were not collapsing but converting more slowly, and that valuation compression was doing the work that earnings revisions were refusing to do. By the close on 2 December 2024, with Nifty IT at the top end of its post-COVID range and HCLTech, Persistent and Coforge having posted twelve-month returns that embarrassed almost every other large sector in the index, that bull case was the consensus. The cycle had run.

This is the retrospective on how that journey actually unfolded, what the leadership rotation inside the pack looked like, how it stacked up against the rest of the Nifty, what FII and DII flows said versus did, and what the historical analog from the previous decade tells us about where 2 December 2024 sat on the curve.

Caption: Weekly bars across the eighteen-month window. Note the long base from August 2023 through May 2024, and the impulse leg that ran from August 2024 into the focus close.

The trigger: a guidance cut nobody priced in

The opening act of this cycle was unambiguous. On 13 July 2023, Infosys reported Q1 FY24 numbers that were, on their own, only modestly soft. The damage was in the FY24 revenue guidance, which the management cut to a 1 to 3.5 percent constant-currency range from the prior 4 to 7 percent. That is not a minor revision in services-sector grammar. It implied that discretionary spend in financial services and telecom verticals, the two biggest swing factors for the Indian large-caps, had not only paused but reversed. The stock gapped down at the open the following session and dragged the Nifty IT index with it. By early September 2023, the index had retraced almost the entirety of its post-March 2023 bounce.

The thing that mattered for the cycle is what happened beneath the headline. TCS, under the new CEO, refused to chase Infosys into a guidance war and kept emphasizing deal TCV, which actually held up. HCLTech, which had spent the prior three years quietly tilting toward Engineering R&D services and away from pure application development, did the opposite of what bears expected, which was to widen its lead in deal wins. Wipro continued to lose share in its top accounts. LTIMindtree, still digesting the L&T Infotech and Mindtree merger of 2022, was in the wilderness on margins. Tech Mahindra was mid-restructuring under Mohit Joshi, who had only just left Infosys to take over.

What this told the desk, if you were paying attention rather than just reading the index print, was that the cycle had bifurcated on day one. The pain was concentrated. The pack was not going to move as a unit.

The grind: August 2023 to May 2024

The middle of any sector cycle is the part that fund letters never describe well, because it consists of nothing happening for a long time while the operating reality changes underneath. That is exactly what occurred in Indian IT between Q2 FY24 results and Q4 FY24 results.

Three things ground forward through this period, each underweighted by the Street at the time.

First, deal TCV across the top five (TCS, Infosys, HCLTech, Wipro, Tech Mahindra) stayed at or above pre-correction run-rates for almost every quarter, even as revenue conversion lagged. That is the classic signature of a deferred-spend environment, not a structurally impaired one. Clients were signing, but stretching ramp-ups. Anybody who had sat through the 2012-13 or 2016-17 cycles recognized the pattern.

Second, attrition collapsed. By Q3 FY24, sector-wide attrition had fallen from peak-pandemic levels above 25 percent toward the mid-teens, and in some pockets into single digits. This was, perversely, the single most bullish operating signal of the cycle. Lower attrition means lower backfill costs, lower training expense, higher utilization, and most importantly, restored pricing leverage for the next deal cycle. Margins in the back half of FY24 stopped deteriorating, and in select names (HCLTech, Persistent) actually expanded sequentially despite weak revenue growth.

Third, the midcap pack went rogue. Persistent Systems, Coforge, KPIT Technologies, and to a lesser extent Birlasoft and Mphasis decoupled from the largecap narrative entirely. Persistent's deal book in the healthcare and software-product engineering verticals continued to compound through the slowdown. Coforge under Sudhir Singh kept landing transformation mandates that the Street had assumed would only flow to TCS and Infosys. KPIT's pure-play automotive software positioning meant it was effectively running its own cycle, decorrelated from BFSI discretionary.

The result, by the time we got to the Q4 FY24 print in April 2024, was a sector that looked exhausted from the outside but was, on the inside, several months into operating recovery. The index spent the months of February through May 2024 in a sideways range that, on a weekly chart, looks in hindsight like the textbook accumulation base. At the time it felt like dead money. It almost always does.

The pivot: June to August 2024

Two things changed the texture of the trade in mid-2024.

The first was the Federal Reserve. By the June 2024 FOMC, the path of US policy rates had shifted decisively dovish in market pricing, even though the first actual cut did not arrive until September. For Indian IT, where the discretionary spend cycle of large US BFSI clients is rate-sensitive on a six-to-nine-month lag, this was the single most important macro input. Brokerages began pre-positioning. Nomura, Jefferies, Morgan Stanley and Kotak Institutional Equities all published variants of the same upgrade thesis between June and August 2024: deal commentary was firming, BFSI client conversations had improved, and the multiple compression that had defined FY24 had gone too far given the operating reset.

The second was the FII flow reversal. Through CY23 and the first half of CY24, foreign flows into Indian IT had been a slow drip outward, occasionally interrupted by short-cover rallies. From August 2024 onward, NSDL sectoral flow data showed a clear shift, with IT services becoming a destination for incremental FII allocation rather than a source. DII flows, which had been the supportive bid through the worst of the slowdown, did not pull back. The trade was suddenly two-sided in the wrong direction for bears.

The Q1 FY25 results season in July 2024 confirmed the read. Infosys, the same Infosys that had shocked the Street fifteen months earlier, raised its FY25 revenue guidance at the Q1 print and raised it again at the Q2 print in October. TCS posted its strongest deal TCV in seven quarters. HCLTech maintained its momentum. Wipro, still the laggard, at least stopped getting worse, which was enough to trigger a low-quality short-cover rally in the name.

Caption: Daily timeframe across the rally leg. The pace of the move accelerated visibly after the US election print on 5 November 2024.

The acceleration: September to early December 2024

The cycle's final leg was driven by a combination that nobody on the desk would have drawn up in June 2023.

On 18 September 2024, the Fed delivered a 50 basis-point cut, larger than consensus, which the market interpreted as confirmation that the discretionary spend window was reopening. On 5 November 2024, the US presidential election delivered a Trump victory and a Republican sweep, which the Indian IT trade read in a very specific way: a stronger US dollar (positive for offshore revenue translation), the prospect of US corporate tax cuts (positive for client capex appetite), and crucially, no incremental visa hostility in the immediate aftermath, contrary to what some had feared. The H1B narrative was a tail risk, but the near-term flow was unambiguously positive.

Between 6 November 2024 and 2 December 2024, the Nifty IT index posted one of its strongest four-week runs of the prior three years. HCLTech and Persistent traded at fresh all-time highs. TCS reclaimed levels last seen in early 2022. Infosys, still trading below its January 2022 peak, closed in on it. The midcap pack went vertical. Coforge, KPIT, and Persistent all delivered trailing six-month returns north of what most of the Nifty 50 had managed across the full year.

This is the part of the cycle where the participation broadens, the laggards catch a bid, and the high-quality names get richly priced. By the close on 2 December 2024, every name in the top five had received at least one fresh sell-side upgrade in the prior eight weeks. Consensus FY26 earnings revisions for the pack were running positive for the first time in two years. The narrative had completed its 180.

Leadership rotation inside the pack

The internal scoreboard for the cycle, as it stood on 2 December 2024, was clear on relative performance even if I'm not going to fabricate exact percentage returns. The ranking, top to bottom across the eighteen-month window:

HCLTech led the largecaps unambiguously. The combination of ER&D-vertical mix, software business stability, and a margin profile that held up through the trough made it the cleanest expression of the cycle. Persistent Systems led the midcap-and-broader pack and probably the entire sector on a total-return basis, with a deal book that compounded through the slowdown and a multiple that expanded as the macro turned. TCS held its own through the trough on the strength of operating discipline and emerged with leadership intact, even if the stock spent most of CY24 catching up to where the operating story had already been. Coforge mounted a credible challenge in the midcap large category and rerated meaningfully on consistent execution. KPIT ran its own decoupled cycle on the automotive software vertical and was, for stretches, the strongest performer in the listed services universe.

Infosys was a stock-specific recovery story rather than a cycle-leadership story. After the July 2023 guidance shock, it spent twelve months rebuilding credibility on the print, and by Q2 FY25 had restored its growth premium versus the median largecap. But it never led the pack in this cycle the way it had in some earlier ones. Wipro was the laggard from start to finish, undergoing a leadership transition under Srini Pallia from April 2024 and unable to escape the share-loss narrative in its largest accounts. Tech Mahindra under Mohit Joshi began executing a credible restructuring, and the stock responded to the operating thesis, but the absolute growth trajectory remained the weakest of the large names. LTIMindtree completed its integration but spent the cycle defending margins rather than capturing the upcycle.

The cleanest read of the leadership rotation was this: the cycle rewarded operating discipline through the trough, not balance-sheet size. The names that did not give up on margins during FY24 were the names that compounded through FY25.

Cross-sector comparison: where IT sat in the Nifty league table

This was, by some measures, the most interesting question of the entire window. The Indian equity market between June 2023 and December 2024 was not a uniformly bullish tape. It was a tape with one of the widest sectoral dispersion ranges of the prior five years.

The leaders for the full window, on a sectoral total-return basis, were broadly: Realty, Capital Goods/Defence, Auto (particularly two-wheelers and CV-adjacent names), and PSU-banking/PSU-utilities through the H2 CY23 to H1 CY24 leg before they corrected. The laggards through the heart of the period were Consumer Staples (FMCG), Private Banks (a notable underperformer for most of the window), and IT itself through CY23 and most of H1 CY24.

The setup at the start of November 2024 was a sectoral rotation that the Street had been waiting for almost twelve months: out of the overheated industrial-and-PSU narrative, into laggards with operating turn, with IT as the cleanest beneficiary. That rotation delivered the final acceleration leg into the 2 December 2024 close.

If you ranked Nifty IT for the full 2023-06 to 2024-12 window against the broad sectoral indices, it ended up in the upper-middle of the table, not at the top, but well above the bottom. The achievement of the cycle was that a sector starting in disgrace and middle-of-pack on operating momentum had, by the end of the window, become the rotation trade of choice.

Caption: The focus session itself. Note the controlled intraday range and the absence of late-day selling, both signatures of a tape in absorption rather than distribution.

Earnings arc: the three quarters that mattered

The aggregate earnings arc across the top five through the cycle is best understood as three distinct quarters.

Q2 FY25 (July to September 2024 quarter, reported October to November 2024) was the cleanest print of the recovery. Revenue growth had returned to mid-single-digit constant-currency for the median largecap. Margins were either stable or expanding. Deal TCV remained strong. Guidance commentary, both qualitative and quantitative, was the most constructive since FY22. This was the print that put the cycle on the front foot of every sell-side desk in Mumbai.

Q1 FY25 (April to June 2024 quarter, reported July to August 2024) was the inflection. It was not, on its own, a great quarter on growth. But it was the quarter in which the deal commentary turned and Infosys raised guidance, which was the moment the trade became tactically actionable.

Q4 FY24 (January to March 2024 quarter, reported April to May 2024) was the trough. Revenue growth was at its weakest, BFSI commentary was at its most cautious, and margins were under pressure. But, importantly, the prints were not catastrophic. There were no further guidance shocks. The absence of disaster, more than anything, was what allowed the H1 CY24 base to form.

The three-quarter arc, taken together, told the story of a sector that had absorbed a discretionary-spend pause, reset its cost structure, retained its deal pipeline, and re-engaged demand as the macro turned. Textbook.

FII and DII flows

NSDL sectoral flow data through the window showed two regimes. The first, from June 2023 through July 2024, was characterized by net FII selling in IT services, partially offset by domestic mutual fund accumulation in the midcap and select largecap names. The second, from August 2024 through 2 December 2024, was characterized by net FII buying in IT services, with DII flows remaining supportive but lower-conviction relative to the FII bid. The handoff was visible in price action, particularly in the largecap names where FII ownership is the swing factor at the margin.

Brokerage action across the window was, in hindsight, a near-perfect contrary indicator at both ends. The trough of broker enthusiasm coincided almost exactly with the H1 CY24 base. The peak of broker enthusiasm, as one would expect, was the late-November 2024 print itself. Anybody who used sell-side conviction as a flow-against signal had a very good cycle.

Historical analog

The closest analog for this cycle in the recent history of Indian IT was the FY13-14 window. The setup then was conceptually similar: a multi-quarter discretionary slowdown in US BFSI verticals, margin pressure across the largecaps, a leadership reset (TCS pulled away from Infosys decisively in that cycle), and a recovery that was led by improving deal commentary several quarters before revenue growth actually reaccelerated. The pace of the eventual rerate, once macro turned, also rhymes.

The FY18-19 cycle is the second-best analog and probably the more informative one for what came next. In that window, Indian IT walked out of a similar slump on the back of digital transformation spend, ran a strong rerate leg through CY18, and then spent CY19 consolidating before the COVID-era surge. The relevant lesson is that the end of the rerate leg, which is roughly where 2 December 2024 sat on the curve, was not the end of the upside. It was, however, the end of the easy money. The next twelve to eighteen months in that earlier analog were a stock-picker's tape, not a buy-the-index tape.

That distinction, between cycle entry and cycle late-stage, was the entire game on 2 December 2024.

Where the cycle stood at the close

By the close on 2 December 2024, the Indian IT services trade had moved from "consensus avoid" to "consensus overweight" in a span of roughly sixteen weeks. Valuations, on consensus FY26 earnings, had compressed and then expanded back toward the upper end of their five-year range for the high-quality names (HCLTech, Persistent, TCS) and were approaching mean-plus-one-standard-deviation for the median largecap. The midcap pack was, in several cases, trading at multiples that left no room for execution stumbles.

Earnings revisions were positive but the easy revisions had been delivered. Operating momentum was confirmed but the comp base for FY26 was now harder. The flow tailwind was real but FII positioning had moved from underweight to neutral-to-overweight, which mechanically reduces the marginal incremental bid. None of these are sell signals on their own. Collectively, they describe a sector that had moved from undervalued-and-under-owned to fairly-priced-and-properly-owned.

The cycle had run. It had not yet broken.

Verdict

Stance: NEUTRAL Horizon: 3mo Rationale: The cycle had delivered its rerate leg by 2 December 2024, valuations had normalized toward the upper end of the post-COVID range, FII positioning was no longer a marginal tailwind, and the next twelve weeks required either a fresh earnings catalyst or a fresh macro impulse to extend the trade. Stock-picker's tape from here, not a buy-the-index tape. HCLTech and Persistent were the cleanest holds. Wipro remained an avoid on relative execution. Infosys offered the best risk-reward for incremental capital looking for laggard catch-up within the largecaps.

The lesson of the eighteen-month window, for anybody building a framework around Indian IT services cycles, was the one the desk has had to relearn every five or six years. The sector does not break the way bears want it to break. It does not run the way bulls want it to run. It absorbs discretionary spend shocks, resets its cost base, retains its client relationships, and waits for the macro to turn. When the macro turns, the rerate is faster than anyone is positioned for. By the time the consensus catches up, the easy money has already moved.

On 2 December 2024, that money had moved. The trade from here was about earning the second leg, not catching the first.