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Subdued quarter

Athena challenges drags on BSS segment

• Updater Services (UDS) reported 1QFY26 revenue growth of 7% YoY (down 1% QoQ) to INR7.0b, below our estimate of ~INR7.5b. Core EBITDA margin came in at 5.6% (est. 6.9%), down 70bp YoY. Consolidated adj. PAT stood at INR290m (up 13% YoY), below our estimate of INR343m.
• 1Q revenue/PAT grew 7%/13.1% YoY, whereas EBITDA declined 3.9% YoY. For 2QFY26, we expect its revenue/EBITDA/adj. PAT to grow by 13.2%/4.9%/ 14.6% YoY. We reiterate our BUY rating and a TP of INR330 (premised on 14x Mar’27E EPS).

Our view: BSS segment to remain soft in 2Q and 3Q

• The IFM segment delivered double-digit growth (~10% YoY) during the quarter. While management indicated this was in line with the business plan, sequential growth was softer due to seasonality in the catering business and subdued spending by non-industrial clients. Additionally, higher year-end billings in the previous quarter had elevated the base. Nevertheless, management remains focused on scaling up profitability through high-value, technical contracts.
• The BSS segment was a major miss, reporting a modest 1% YoY growth. The muted performance was attributed to cautious hiring and spending by the IT sector, along with client-specific challenges in Athena. We expect these headwinds to persist over the next couple of quarters. Additionally, rising client expectations around RoI have begun to impact delivery models, particularly in sales and enablement services. We expect 2Q and 3Q to remain soft for the BSS segment. Accordingly, we build in a modest recovery in this business, expecting single-digit YoY growth in 2Q/3Q.
• Athena continued to witness some clients transitioning previously outsourced operations back in-house. The company is actively working to expand its client base beyond BFSI. Matrix reported a mixed performance. A broader slowdown in the IT sector weighed on volumes in the Employee Background Verification segment, while in Audit and Assurance services, client interest remains encouraging despite pricing pressures.
• Margins: EBITDA was impacted by lower revenue growth, revenue decline in Athena (a high-margin business) and merger-related costs. IFM margins were further weighed down by a one-off provision for trade receivables. The company expects to deliver 12-15% PAT growth in FY26.

Valuation and changes to our estimates

• We broadly retain our estimates, given the solid foothold of UDS in the IFM business and the high-margin BSS business. However, we expect the next couple of quarters to be soft for BSS segment. We expect a CAGR of 15%/21% in revenue/EBITDA over FY25-27. Reiterate BUY with a TP of IN

Miss on revenues and margins; 14 new logos added

• Revenue was up 7% YoY and down 1% QoQ at INR7.0b, below our est. of ~INR7.5b.
• Revenue growth was aided by 10% YoY growth in IFM, whereas BSS reported 1% YoY growth.
• EBITDA margin came in at 5.6% (est. 6.9%), down 70bp YoY. IFM’s PBT margin was up 30bp YoY at 4.5%. BSS’ PBT margin was down 180bp QoQ at 4.8%.
• Consolidated adj. PAT stood at INR290m (up 13% YoY), below our estimate of INR343m.
• RoCE stood at 17.9% on an annualized basis in Jun’25 vs. 22.1% in Mar’25. The company added 14 logos in 1QFY26. Head count stood at 73,129, up 9% YoY.
• UDS has long-standing relationships with customers having 95% retention over a five-year window in the both businesses.

Key highlights from the management commentary

• Global uncertainties, including rising tariffs, have led to cautious hiring and spending by large MNCs and IT companies, resulting in muted performance in the BSS segment during the quarter.
• Consolidated growth is expected to stabilize in the 13-15% range for FY26.
• IFM reported 10% YoY growth, in line with the business plan. However, seasonality in the catering business and modest spending by non-industrial clients contributed to lower QoQ growth.
• IFM growth is expected to outpace BSS growth going forward.
• In IFM, UDS completed contract rationalization and is now focusing on streamlining operations. The aspiration is to grow at 3x the GDP growth rate, supported by the expansion of co-working spaces and growth in automotive factories.
• In BSS, delivery models saw moderation, and clients have raised expectations on RoI. As a result, the next couple of quarters are expected to be flat in terms of sales and enablement services.
• Denave: 85% of revenue comes from clients with 7+ years of relationship.
• Athena: Revenue and profitability were impacted by some clients continuing to transition previously outsourced operations back in-house. These are the same clients that began this transition in the previous quarter; no new clients were lost in 1Q.
• The company expects 12-15% growth in profitability in FY26.

Valuation and view

• We believe UDS will benefit from the long-term trend of outsourcing non-core business operations for greater efficiency and service quality. With continued momentum in the IFM space and an inorganic growth engine in the high-margin BSS vertical, we expect UDS to deliver sustainable and profitable growth.
• However, we expect the next couple of quarters to be soft for BSS segment. We expect a CAGR of 15%/21% in revenue/EBITDA over FY25-27. Reiterate BUY with a TP of INR330 (premised on 14x Mar’27E EPS). Our TP implies a 22% upside potential.

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