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Within Elara IT universe, we expect HCL Technologies (HCLT IN), Coforge (COFORGE IN) and Persistent Systems (PSYS IN) to report strong sequential dollar revenue growth in Q3FY25. Revenue growth for COFORGE and PSYS may be supported by strong orderbook and for HCLT, by its seasonally strong Products & Platform (P&P) business. Dollar-denominated revenue growth for Tata Consultancy Services (TCS IN), Infosys (INFOSYS IN), Wipro (WPRO IN) and Tech Mahindra (TECHM IN) should sequentially drop due to furlough impact and unfavorable currency movements. Furlough impact in Q3 is expected to be normal this year. Expect LTIMindtree (LTIM IN) to post a 1.5% sequential growth in CC terms in Q3FY25E. Margins for TCS, HCLT, TECHM, COFORGE and PSYS may improve sequentially, led by cost optimization and for INFO and LTIM may drop given negative operating leverage and the impact of wage hike, respectively.

Revenue growth – HCLT, PSYS and COFORGE to lead: We expect HCLT to report a sequential growth of 3.3% in USD terms, led by its P&P business. Expect a 20% QoQ growth in P&P due to seasonality. IT services and ER&D business may grow by 1.5% and 1.8% QoQ, respectively. For PSYS, we expect a 3% QoQ USD revenue growth in Q3E, driven by strong orderbook. Growth in Q3 should be led by Hi-Tech and HLS verticals and normal furloughs may play out for the BFSI vertical due to which growth may seem optically lower than in Q1/Q2. For COFORGE, expect a 3%+ growth in Cigniti and Coforge standalone business, resulting in a 3.2% QoQ USD revenue growth (on strong orderbook).

Furloughs likely to hit growth TCS and Infosys: For TCS, we expect USD revenue to decline 0.8% QoQ, hit by furloughs and ebbing revenue from the BSNL deal. For INFOSYS, the ask rate to reach lower/upper range of FY25 revenue guidance is (0.7%)/+0.25%, per our calculation in CC. Expect a CC / USD drop of 0.3%/1% QoQ, led by furloughs. For WPRO, Q3 revenue growth guidance was within -2-0% in CC. Expect revenue to decline 0.9% (median of the guidance) in CC and USD revenue to drop to 1.5% due to cross-currency headwinds. WPRO faced client-specific issues, which hit growth in BFS and Healthcare verticals. This may continue in Q3, which along with furloughs may drag down growth. For TechM, growth tailwinds are seasonally strong Comviva business but continued weakness in the Telecom vertical may drag down overall revenues. We build in a revenue drop of 0.5% in USD terms in Q3E. For LTIM, expect 1.5% QoQ growth in CC and 1.2% in USD.

Margins to improve for most plays, except for LTIM and INFOSYS: LTIM’s margin may be hit by wage hike – Expect 200bps QoQ impact on margin in Q3E. INFOSYS’ margin may drop 30bps QoQ due to negative operating leverage. TCS, with wage hike already given in Q1FY25, may see a margin expansion of 40bps QoQ due to deceleration in BSNL deal-related costs, which hit Q2 margins. WPRO’s margin may dip just 10bps QoQ despite the main impact of wage hike reflecting in Q3 (salary hiked on 1 September). This is due to higher offshoring. HCLT, which deferred its wage hike from July to September, may witness an impact on IT Services’ margins (we factor in 60bps impact). The impact is likely to be mitigated by momentum in the P&P business (expect 30%+ margin in Q3E), resulting in a 40bps QoQ improvement at the company level. TechM’s margin may improve 40bps QoQ due to cost rationalization. Expect margin to expand 50bps QoQ each for COFORGE and PSYS led by strong revenues (both have hiked wages in Q2FY25).

We prefer TCS within large-caps as valuations are comforting. We prefer LTIM in the mid-cap space, especially after 15%+ correction in the stock price in the past month (also, as it is a play on strengths of erstwhile LTI and Mindtree). LTIM is aiming for USD 10bn revenues in FY31/32, which may not be challenging in our view, considering its prior growth rates, strong orderbook and healthy pipeline.

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