IT sector Q4 review: Tier 2 companies continue to outperform Tier 1 IT firms; check analysis

Indian IT companies are back in focus after global headwinds tone down on the reduced risk of recession and de-escalation on the trade war front. Further, softening inflation in the US and globally added more hope for early and faster rate cuts. The technology stock’s benchmark index, NASDAQ, has now turned positive for 2025, recouping all the losses from the lower levels. The NASDAQ index has rallied 27% in over a month from April 7, when it hit the 52-week low of 16,542. Similarly, India’s benchmark for technology companies, the NIFTY IT index, also rallied 22% from the 52-week lows of 30,197 in the same period starting April 7.

The renewed interest in the IT stocks was primarily driven due to better than better-than-expected earnings in Q4FY25, abating recession fears due to serious de-escalation by the US-China. However, company-specific and segment-specific challenges persist. Here’s how tier 1 and tier 2 IT companies fared in Q4 results.

Topline growth

The large-cap or Tier 1 IT companies, which have revenue above $1 billion, have recorded moderate growth in the topline owing to challenges related to the slowdown in key markets like the US and Europe. FY25 witnessed recessionary pressure due to a high inflation and high interest rate scenario, which led to lower discretionary spending by US customers. Hence, top Tier 1 IT companies like TCS, Infosys, and Wipro witnessed a topline growth in low single-digits at 3-4%. HCL Technologies stood out as the clear winner from the top tier 1 companies, which saw 7.1% YoY growth in revenue for Q4FY25.

On the other hand, the mid-size tier 2 IT companies like Persistent Systems, LTI Mindtree, Coforge, Mphasis and Hexaware technologies witnessed superior topline growth in the range of 7-10%. The strong topline growth can be attributed to their focus on niche segments like GCC, automotive and engineering and more.

Operational metrics

The Tier 1 companies reported stable operating margins in the range of 15-24%, with HCL Technologies and Tech Mahindra outpacing the peers with superior performance. Margin stabilisation was largely attributed to cost optimisation measures and lower or no wage hike during the quarter. Infosys faced pressure on margins due to AI investments and furloughs during the quarter.

Meanwhile, Tier 2 IT companies saw improvements in margins due to better utilisation and execution. Persistent witnessed a 113 bps jump in the EBIT margin, while Mphasis, Coforge and LTI Mindtree saw margins in the range of 11% to 15%.The margin stability was maintained due to lower legacy burdens, but volatility remains higher in Tier 2.

Deal wins

Wipro secured $1.8 billion in large deals, while Tech Mahindra added clients in the large 5-50 million category. Due to global headwinds, focus shifted to smaller deal wins, which have a fast conversion rate. Tier 2 companies like Persistent saw significant deal wins with a total contract value of $329 million, and Coforge and LTI Mindtree won deals in automotive and GCC(Global capacity centres).

Share price performance

In line with its earnings performance and outlook, the tier 2 companies posted a strong recovery from lower levels as compared to their larger peers. Share price of companies like Persistent, Coforge, LTI Mindtree recovered more than 30% from the recent lows of April 7. While shares of large-cap tier 1 companies like TCS, Infosys, and Wipro saw mid-teen numbers for recovery from lower levels in the same period.