Expect IT companies to witness a soft quarter despite seasonal strength: Equirus Securities
Financial services firm Equirus Securities has released a press note detailing a preview of Q1FY26 earnings of the IT sector. As per the press note, the Indian IT services sector is expected to witness a soft quarter despite the seasonal strength. IT companies’ earnings are expected to be mixed across the board with a very soft quarter for ER&D services companies on a QoQ basis. Equirus expects some tweak in Infosys’s FY26 sales growth guidance. The research house prefers Infosys and Tech Mahindra amongst large caps IT companies, and Zensar / Mphasis/ KPIT/ eClerx amongst midcaps on a relative basis.
Expect soft growth in most of Top 6 large caps
Equirus Securities expects the top 6 large caps to register QoQ growth of (-) 2.6% to (+) 1.4% in US$ Sales in CC terms in 1QFY26E. Equirus Securities expects high cross currency tailwinds QoQ across top 6 large caps in the range of 120- 230 bps QoQ. A healthy sales performance is expected from some of the midcap IT/BPO Services companies incl. Coforge, PSYS, RSI, Mphasis, Zensar and eClerx with expected US$ Sales growth in the range of 1.3%-7% QoQ (Mphasis at the lower end and Coforge at the upper end) in CC terms. The research house expects a constant currency US$ sales decline in the range of 3.1%- 3.6% QoQ in all three ER&D Services companies we track incl. Cyient DET, KPIT Tech & LTTS considering relatively higher spend pressure especially in manufacturing & hi-tech segment.
Demand commentary to remain cautious
Equirus Securities expect demand commentary to remain cautious (unless some certainty relating to tariff related issues emerges ahead). However, they believe vendors are still witnessing better demand tailwinds in BFSI. For 1QFY26E Equirus expects stable to lower order TCV trends (on QoQ basis) across many companies to be largely driven by seasonal issues and also slower decision making by clients. Key thing to watch will be management commentary regarding deal pipeline and any further decision-making delay regarding start/ramp up of earlier won deals.
Expect some tweak in Infosys’s FY26E Sales growth guidance
Equirus expects Infosys to guide for 1.0-3.25% CC growth in US$ Sales to largely factor incremental inorganic growth contribution of c. 0.4% (earlier growth guidance of 0-3%) with no change in its EBITM guidance of 20-22% for FY26E. We expect no change in HCLT CC US$ Sales growth guidance of 2-5% (c.1-4% Organic) both for Services & Consol. business with no change in its Consol. EBITM guidance of 18-19% for FY26E. Equirus expects Wipro to guide for (-) 1% to (+) 1% QoQ growth in IT Services US$ Sales for 2QFY26E in CC terms.
Remain selective
Given recent re-rating in the sector valuations, Equirus recommends remaining selective and prefer Infosys/TechM amongst large caps and prefer Zensar/Mphasis/KPIT/eClerx amongst midcaps on a relative basis.
TCS
US$ revenue is expected to dip QoQ by 0.4% in CC terms; tepid growth is largely due to expected ramp down in BSNL deal and some softness in sales growth in international markets. Despite deferral of wage hikes, some Fx related benefits and likely dip in pass-through cost, Equirus expects EBIT margins to improve marginally as soft demand likely to result into lower operating leverage and our expectation of ongoing investments. Equirus expects material dip in TCV QoQ given seasonal softness.
Key things to look for: Demand outlook in BFSI, retail, communication, hi-tech and other key segments, impact of volatile macro/tariff issues on demand/its clients, deal pipeline esp. for large/mega size deals, client decision making and pricing trends, outlook on CY25E/FY26E IT budgets and any further update on growth strategies.
Infosys
Equirus expects 3.4% Qoq increase in US$ Sales (CC: +1.4% QoQ growth) including inorganic growth contribution of c.0.3% QoQ. EBIT margins are expected to dip by 10 bps QoQ led by wage hikes for leaders/seniors and normalisation of various expenses (vs. write back in 4QFY25) vs. tailwinds incl. absence of visa cost, some currency benefits and ongoing cost optimisation through project Maximus. Equirus expects decline in other income (considering non-recurring income in 4QFY25) and higher tax rate. Equirus expects Infosys to guide for 1.0-3.25% CC growth in US$ Sales largely to factor inorganic growth contribution of around 0.4% (earlier guided growth of 0-3% without factoring inorganic growth contribution) with no change in its EBIT margin guidance (20-22%) for FY26E.
Key things to look for: Demand outlook in FY26E/1HFY26E, deal pipeline esp. for large/mega size deals, client decision making, pricing trends, details/assumptions for FY26E Sales and EBITM guidance.
Wipro
Equirus expects IT Services US$ sales to dip by 2.6% QoQ in CC terms (vs. guidance of QoQ dip of 3.5% to 1.5% in CC terms). Recurring IT Services EBIT margins are expected to dip marginally by 8 bps QoQ given weak growth and investments. Equirus expects Wipro to guide for a decline of 1.0% QoQ to growth of 1% QoQ in IT Services' US$ Sales in CC terms for 2QFY26E (likely to factor Marelli announced Bankruptcy). Expect Order intake (esp. for large deals) to normalise and dip given 4QFY25 TCV included TCV from mega deal win. Equirus 1QFY26E IT Services Sales and EBIT estimates are excluding any adverse impact from Marelli's announced bankruptcy.
Key things to look for: IT services US$ sales growth and margin outlook esp. for 2QFY26E and beyond, margin outlook for near term as well as medium to long term, any portfolio/client specific issues especially resulting from ongoing geopolitical/macro concerns, update on deal pipeline (esp. for mega deals), client decision making and order book for 1QFY26E and beyond, details on capital allocation policy, any further sizable M&A, any further update on growth strategies.
HCL Tech
Equirus expects US$ revenue growth of 1.4% QoQ (CC QoQ dip of 0.9% due to seasonal weakness in IT Services and P&P business). We expect CC dip of 0.9% QoQ in Services. EBIT margins are expected to dip by 77bps QoQ led by seasonal weakness. Equirus expects no change in HCL Tech’s CC US$ Sales growth guidance of 2-5% (c.1-4% organic) both for Services & Consol business for FY26E. Equirus also do not expect any change in its Consol. EBITM guidance of 18-19% for FY26E.
Key things to look for: Demand outlook for ER&D services, P&P, business application, IMS and digital services in FY26E. Impact from ongoing macro issues on HCL Tech growth/margin outlook or on its clients, if any. Any update on the acquisition strategy in the medium term, capital allocation policy and deal pipeline/wins.
Tech Mahindra
Equirus expects QoQ dip of 0.8% in US$ Sales in CC terms considering seasonal softness in Comviva and continuing softness in demand from some of the hi-tech clients. EBIT margins are expected to improve by 39bps QoQ on reported basis largely led by cost optimisation efforts (Project Fortius) and some currency benefits which will be partly compensated by investments. Equirus expects deal TCV to remain healthy on YoY basis.
Key things to look for: FY26E/long term sales growth & margin outlook, impact of ongoing geopolitical/macro concerns on TechM/clients, Telecom/Enterprise segment's demand outlook, demand commentary related to 5G technology, new business TCV wins, deal pipeline and client decision making for same. Update on capital allocation policy and any further update on growth strategy.
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