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3QFY25 will be indented by furloughs. Its impact will likely be similar to last years’. That is hardly encouraging given furloughs were deeper (more clients) and longer last time around. Discretionary spend is restricted to few pockets still. Semblance of stability in manufacturing vertical is balanced by rising caution in Lifesciences’. Sequential decline implied in Accenture’s (ACN US; Not Rated) 2Q guide offers some clue of likely 3Q trajectory. In summary, we expect a muted (0.5)-1.4% cc QoQ growth for large-caps (ex-HCL). HCL’s growth should however be stronger (5.5% cc QoQ) on specific factors (Software sales, in-organic). USD’s strength against a basket of currencies means USD print will be even lower ((1.4)-1.1%). Cross-currency headwind could also erode benefit of INR depreciation on margins, at least partially. We expect 10-50 bps QoQ margin expansion across top-5. Among mid-caps, we expect PSYS/Coforge to outpace larger peers again. Auto ER&D players might witness growth deceleration as OEMs re-prioritise R&D spend. 3Q performance is seldom a reflection of underlying demand. Client budgets, deal wins and uptick in short duration deals would be better guage. Fed’s recent hawkish tone might influence client budgets. On deals, we believe ACN is taking market share. Any evidence to the contrary will be welcome. We don’t expect much changes to current full year guidances. PSYS/COFORGE could surprise positively.

* 3QFY25 revenue growth – Furloughed: We expect large-cap IT Services players (top-6) to report -0.5% to 5.5% cc QoQ growth in 3Q. USD revenue growth could be lower by 30- 130bps. Among large-caps, we expect HCLT to report the highest growth (5.5% cc QoQ), aided by seasonal uptick in Software sales (+25% QoQ) and CTG contribution (60bps; JMFe). TCS could report flat cc growth as BSNL turns into a headwind now. INFO could be closer to the top-end of its -0.5% to +0.5% QoQ implied ask rate. Among midcaps, PSYS/Coforge could report a healthy 4%+ cc growth, aided by large deal ramps. Mphasis might see higher impact of furloughs (-180bps QoQ; Exhibit 7) owing to higher T&M based contracts and BFSI/Hi-tech exposure (where furloughs tend to be higher). KPIT could report c.1.5% cc QoQ, marginally ahead of the ask rate for lower end of its guide.

* Margin – FX puts and FX takes: We expect margins to be stable outside of wage impact as INR depreciation benefit is partially eroded by adverse cross-currency. HCL, LTIM and TATATECH will see full quarter impact of wage hikes while Coforge/PSYS will benefit from its absence (rolled-out in 2Q). We estimate 10-50bps margin expansion among top5. INFO’s project Maximus and TECHM’s project Forteus (margin programs) should continue to yield benefits, though a weak top-line might weigh on headline margins. HCLT’s margin expansion (+50bps QoQ) will likely be lower than that of previous 3Qs due to unfavourable comp (2Q margin was elevated due to higher Software sales). LTIM could see 220bps QoQ decline weighed by 300bps impact of wage hike. Coforge’s adjusted EBITDA margin could expand by 130bps. Higher ESOP expenses would however keep the reported margin flattish. We expect PSYS/KPIT to report 50bps margin expansion.

* Things to watch out for: ACN's commentary indicated status quo on discretionary spend. Our pre-quarter interactions with the companies also indicate no material change on the ground. Most however hope of a better IT budget for CY25 as uncertainty around US Presidential election and Fed rate cut is behind. Don’t expect much clarity to emerge as clients might wait for Trump to take office (20th Jan) before firming up their plans. Any spill over of furloughs (like FY24) into Q4 could be concerning. Pick-up in deal TCV, though unlikely, will be important as FY24’s mega deals’ contribution come into the base. Durability of smaller deals could be a pre-cursor to discretionary spend revival. We expect INFO to narrow its FY25 guide to 4-4.5%. WPRO could guide for -1% to +1% cc for 4Q.

* Estimate and TP changes: We tweak our estimates as we build 3Q expectations and update FX (Exhibit 10). Material changes are in Coforge and LTIM. For Coforge, a stronger FY25 exit drives 7-9% increase in FY26-27E USD revenues, resulting in (4)-9% EPS upgrade. For LTIM however, we cut FY25-27E EPS by 5-8% on lower margin estimates. We have raised target PER for Coforge (45x to 40x) and PSYS (55x from 48x) to reflect sustained outperformance. There are no changes to our recommendations.

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