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In Q3FY25, we expect the usual seasonal factors to impact sequential revenue growth for our IT Services coverage. However, improvement in growth momentum on YoY basis is likely to continue in Q3, on the back of recovery in BFSI, lower project cancellations, beginning of interest rate cut cycle, and end of uncertainties around US elections, albeit gradually. Furloughs in Q3 remain in line with the past. EBITM performance remains mixed, on sequential basis, depending on salary hike cycle, large deals ramp up, etc. HCLT would lead organic revenue growth in tier-1 companies, while Coforge and PSYS are likely to lead in tier-2. Large deal ramp-ups and strong execution should benefit select companies, even as the demand environment has largely remained unchanged. Recent upgrade in revenue guidance by Accenture lends some credence to the revenue uptick that consensus/we have built-in for FY26. NIFTY IT Index rallied 3%/20% in the last 3M/6M, and outperformed broader markets by 12%/21% over the same period, on anticipation of demand uptick. Clients’ budgets, which will be finalized in early CY25, should provide more clarity as regards the growth trajectory. We upgrade TCS and MPHL to ADD from Reduce, and downgrade PSYS to SELL, while retaining our rating on other coverage stocks. Our pecking order is INFO, TCS, HCLT, TECHM, WPRO, and LTIM in large-caps. Among mid-caps, we prefer SSOF, CYL, MPHL, BSOFT, QUESS, and Zomato.

stable demand and recovery in BFSI Most IT Services companies are likely to report improvement in revenue growth rates on YoY basis in Q3. Recovery in BFSI will aid growth, while weakness in Manufacturing, particularly Auto, is likely to weigh on growth. BFSI is showing signs of healthy recovery, but uncertainties remain on pace of recovery in other verticals. Seasonal furloughs and lower working days should keep revenue growth muted on QoQ basis. Large caps (excluding HCLT) should report muted growth, while HCLT should benefit from software business seasonality and one month of consolidation of CTG. PSYS and Coforge would lead growth in mid-caps, while BSOFT and MPHL to post relatively weak growth. We expect INFO to narrow its guidance to 4-4.5% (from 3.75-4.5%), and HCLT would increase its guidance to 4.5-5.5% (from 3.5-5%), factoring in the CTG acquisition. We expect WPRO to guide to -0.5 to +1.5% growth for Q4FY25. ER&D companies should be impacted by the slowdown in the Auto space.

Seasonal weakness to weigh on sequential growth; YoY growth to improve on stable demand and recovery in BFSI Most IT Services companies are likely to report improvement in revenue growth rates on YoY basis in Q3. Recovery in BFSI will aid growth, while weakness in Manufacturing, particularly Auto, is likely to weigh on growth. BFSI is showing signs of healthy recovery, but uncertainties remain on pace of recovery in other verticals. Seasonal furloughs and lower working days should keep revenue growth muted on QoQ basis. Large caps (excluding HCLT) should report muted growth, while HCLT should benefit from software business seasonality and one month of consolidation of CTG. PSYS and Coforge would lead growth in mid-caps, while BSOFT and MPHL to post relatively weak growth. We expect INFO to narrow its guidance to 4-4.5% (from 3.75-4.5%), and HCLT would increase its guidance to 4.5-5.5% (from 3.5-5%), factoring in the CTG acquisition. We expect WPRO to guide to -0.5 to +1.5% growth for Q4FY25. ER&D companies should be impacted by the slowdown in the Auto space.

Mixed margin performance Companies under our coverage are likely to report mixed performance on margins, depending on salary hike, large deals ramp-ups, M&As, and business mix changes. Select companies with wage hikes (WPRO, LTIM, BSOFT) should report a decline in margins. For Tier-1 companies, we expect margins to see a fluctuation, of –140bps to +100bps, while we expect margins to vary by -160bps to 60bps QoQ for mid-caps.

Key monitorables i) FY25 revenue/margin guidance changes, ii) CY25 IT budget and discretionary spending uptick, iii) deal intake/pipeline, iv) demand trends in key verticals like BFSI, Retail, Manufacturing, Hi-Tech, Telecom, v) hiring plan, as most players have maxed out on the utilization lever, vi) progress on Gen AI, and vii) pricing environment.

Deal wins stable, lack of mega deals In Q3FY25, deal wins should remain similar to previous quarter’s. However, absence of mega deals and continued weak discretionary spending should continue to weigh on overall deal intake in Q3 as well. The overall construct of deal wins should remain similar, with cost takeout and vendor consolidation deals remaining the mainstay. Deal pipeline remains healthy across most companies, while pace of decision making is varying across sectors and clients.

Earnings revision and valuation The demand environment is largely unchanged since the last quarter. With the interest rate cut cycle already under way and the US Presidential elections behind, clarity should emerge in the next couple of months, regarding tech budgets. Green shoots observed in BFSI, particularly in North America, should sustain in Q3. Weakness observed in Europe is expected to continue in Q3. The auto vertical has seen pressure in Q2 which is expected to continue in Q3 as well. We do not expect any improvement in discretionary spending in Q3.

The recent guidance upgrade from ACN (to 4-7% from 3-6% earlier) lends some credence to consensus/our assumptions of a revenue uptick in FY26. According to the management, the demand environment has seen no material change yet, with clients continuing to prioritize large reinvention deals and critical programs, while flow of smaller deals remains weak. Further, the pricing environment remains competitive amid a constrained budget, and continues to experience lower pricing across the business.

We revise earnings estimates of our coverage universe, factoring in the Q3 performance; we also revise USD/INR assumptions (Rs85.5/85.5/87 for Q4FY25E/FY26E/FY27E, respectively). We roll forward our TP to Dec-25E across our coverage universe. We upgrade TCS and MPHL to ADD from Reduce, while downgrading PSYS to SELL. We increase our target multiple for COFORGE to 36x (10% discount to PSYS). TPs for our coverage companies have seen a change of –2% to +27%, factoring in the aforementioned estimate changes.

The BSNL deal ramp-down is likely to weigh on near-term growth rate for TCS, but we expect TCS to participate effectively on the anticipated recovery in demand, on the back of its diversified offerings across cost optimization and transformation. TCS has underperformed the NIFTY IT index by ~15%/14% over 6M/12M, respectively. Although the stock lacks a nearterm trigger due to muted short-term revenue growth expectations, we upgrade TCS to ADD with TP of Rs4,500, on reasonable valuations.

MPHL lacks near-term triggers; however, considering its reasonable valuation, recovery in BFSI and the anticipated uptick in overall growth, we upgrade the stock to ADD with TP of Rs3,150.

We downgrade PSYS to SELL with TP of Rs5,300, considering its rich valuations. The stock has delivered ~52% return in the last 6M; bulk of the returns came from re-rating. We expect the relative growth outperformance to narrow down in FY26E, with anticipated improvement in the demand environment.

The NIFTY IT Index has increased 3%/24% in the last 3M/FY25YTD. This rally in the IT index can be majorly attributed to multiple re-rating on the back of increasing hopes of revenue recovery in CY25/FY26 and rupee depreciation. The pace of earnings cut has reduced over the last few quarters, as project deferments/cancellations have reduced, and due to end of uncertainties around US presidential elections as well as elections in other major developed markets.

Our pecking order is INFO, TCS, HCLT, TECHM, WPRO, and LTIM in large-caps. Among midcaps, we prefer SSOF, CYL, MPHL, BSOFT, QUESS, and Zomato.

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