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Apr-Jun'25 Earnings Preview

Hinting at a slow start

Quick Pointers:

* Weakness in tariff-induced verticals weigh on Q1FY26 performance

* Currency tailwinds help mitigate margin decline

Q1FY26 revenue performance is expected to be weak in an otherwise seasonally strong quarter. Although the intensity of tariff uncertainties has reduced to some extent, demand recovery in tariff-induced verticals continues to be weak with global enterprises remaining cautious and sensing near-term uncertainties. The weakness in demand also tends to defer compensation revision for most of the names. Despite the deferment in wage hikes the improvement in margins would either be flat or negligible due to missing operating leverage. We expect median revenue growth to decline by 1.2% QoQ in CC terms & grow 0.5% QoQ in USD terms. Currency volatility continues with major currencies like EUR and GBP having strengthened against USD by 5.9% and 7.6% QoQ, respectively, which will translate into tailwinds to the tune of 60-400bps QoQ in reported terms.

Vertical wise, BFSI should continue its growth momentum, while hi-tech and ENU should also support growth for selective names. Manufacturing and consumer performance is expected to remain on a weaker trajectory, due to mounting pressure on automotive and retail/CPG segments. Deal signing activities are likely to be flat or see slight improvement sequentially, due to slower decision making and incremental scrutiny weighing on deal closure activities. The accommodative stance on trade policies and tariff deescalation have probably unchecked the odds of hitting the worst. We expect INFY and HCL Tech to inch up the lower band of the FY26 organic revenue guidance by 100bps. Q1 median margins are expected to decline marginally on QoQ basis (PL coverage universe), on account of (1) missing wage hike impact, and (2) cross-currency tailwinds, which should be partly offset by missing operating leverage and INR appreciation against USD.

Tier I & II operating performance: We expect weak performance in a seasonally strong quarter with all companies in our coverage reporting sequential revenue decline in CC terms, except LTIM, MPHL & PSYS. Tier I companies are expected to report median revenue decline of 0.7% QoQ CC. Tier II companies are expected to report median revenue decline of 2.5% QoQ CC with sharp decline in Tata Elxsi & Tata Tech due to weakness in the automotive segment.

On the margins front, we expect median margin to decline for both Tier I and II companies due to weak quarterly performance, which will be mitigated by currency tailwinds. Among Tier I companies, we expect median EBIT margin to decline by 40bps QoQ to 17.3%, while Tier II companies will witness median EBIT margin decline of 20bps QoQ to 15.4%.

Valuation and View

The underlying demand environment remains weak for tariff-induced verticals. Non-discretionary spend takes center stage instead of wide-spread investments in non-critical activities. The conversion from TCV to revenue would continue to be challenging for names that are highly exposed to assetheavy or consumer-oriented verticals. Pace of agentic AI transition from early experimentation to production also seems to be slower on account of underachieving ROI and limited value generation, which further limits positive surprises. IT stocks have rallied over the past few sessions. Therefore, the current valuation seems to be stretched, leaving no potential upside.

We continue to remain positive on TCS, INFY, PSYS and MPHL, which are either less sensitive to discretionary spending or have low exposure to tariff-sensitive verticals. However, given the stock price rally and limited upside potential, we are downgrading INFY to ACCUMULATE (from BUY earlier) and MPHL/PSYS to HOLD (from BUY earlier). The 1-year forward PE multiples of Tier I and II companies are trading at a 25x and 33x, respectively, premium to their 10-year average PE

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