IT Sector Update : Stellar performance by Kotak Institutional Equities
Stellar performance
CTSH reported healthy organic growth of 4% yoy and raised CY2025 growth guidance to 6-6.3% (3.5-3.8% organically). Growth outpaced all Indian IT peers. Margin guidance increased to the upper end of the 15.5-15.7% band. Large deal momentum continued with six deals above US$100 mn TCV. CTSH’s turnaround has progressed well on multiple dimensions without a margin sacrifice, which is impressive. Read-through for the sector—CTSH’s rise has increased competitive intensity in the sector in the period of a slowdown in industry growth—a concern for peers.
Healthy organic growth of 4% yoy; 2025 organic guidance raised to 3.5-3.8%
CTSH reported revenue of US$5,415 mn, which grew 3.2% qoq and 7.4% yoy in US$ terms. In c/c terms, growth was 2.8% qoq and 6.5% yoy (ahead of its 3.5-5% yoy growth guidance). Growth was driven by large deal ramp-ups in multiple verticals and healthy demand in BFSI. Growth was broad-based across verticals and geos. All verticals and geos grew organically yoy. Following a guidance beat, CTSH raised CY2025 revenue growth guidance to 6-6.3% (3.5-3.8% in organic terms) from 4-6% earlier. CTSH expects 2.5-3.5% yoy growth in 4QCY25.
Margin guidance increased to upper end of 15.5-15.7%
Adjusted EBIT margin increased 40 bps qoq and 70 bps yoy to 16%, aided by cost optimization, a shift in the wage time timeline to 4Q from 3Q in the previous year and rupee depreciation. SG&A, as a percentage of revenue, declined 110 bps yoy to 15.4%, driving a margin improvement. CTSH raised its EBIT margin guidance to the upper end of 15.7%, a 40 bps yoy increase from the 2024 level. CTSH’s margin resilience is impressive, given headwinds from (1) a ramp-up of multiple large deal wins that we expect to have been competitively bid and (2) the consolidation of the Belcan acquisition—a lower margin business. Adjusted EPS of US$1.39/share was up 11% yoy. CTSH raised its EPS guidance to US$5.22-5.26 from US$5.08-$5.22 previously, yielding growth of 10-11%.
Large deal momentum continues
TCV declined 5% yoy in 3QCY25 on lumpiness in deal bookings. TCV on a ttm basis was up 5% yoy to US$27.5 bn at a book-to-bill of 1.3X. ACV on ttm basis grew similarly to TCV. The total large deal TCV was up 40% yoy YTD. CTSH won six large deals with TCV >US$100 mn, taking the YTD total to 16. Large deals are becoming more balanced between the productivity-led and innovation-led themes—a shift from being predominantly cost takeout-driven in the past.
Bullish on AI opportunities
CTSH is embracing AI-led productivity in software development. The company is not apprehensive of headwinds from revenue deflation. Instead, it hopes that benefits from increased participation in cost-efficiency deals and modernization programs will help offset headwinds. Additionally, the CEO is confident that savings from AI-led productivity will be re-invested in scaling AI across enterprises—a huge opportunity. Management also indicated that the BPO business will benefit immensely from agentic AI.
Read-through for Indian IT services
CTSH has not only delivered healthy growth numbers in 3QCY25, but it has also outpaced peers. Sequential growth of 2.8% in c/c is the best among Tier 1 IT. Organic growth of 4% yoy is also the highest among Tier 1 IT. CTSH has upped its game in financial services.
CTSH’s performance has undergone a smart turnaround under Ravi Kumar’s leadership. It has revived struggling areas and boosted areas of strength. Performance in financial services is much improved and now on par with or better than peers. Wallet share gains are visible in the healthcare vertical, where multiple peers have reported yoy revenue declines. The company has also increased participation in large deals and emerged as a formidable competitor. Historically, CTSH was an easy target for market share gains by India-listed players. That is no longer the case, with the company now demonstrating its own share gains. Additionally, CTSH has executed well on talent management by reducing senior management churn over time, getting in external hires and lowering overall attrition rates to levels that are comparable to peers. We also note that the turnaround has not involved a margin sacrifice.
Competitive intensity has risen across the sector, especially during a phase of a slowdown of industry-wide growth, which is a concern. Both leaders and laggards are competing for a limited set of large deals. This could result in (1) further aggressive moves on contract pricing and (2) higher productivity promises to be delivered through the application of AI. These could have implications on margins and contract execution risks.
Listing in India on the cards?
CTSH indicated that it is in the early stages of a comprehensive review to assess a potential primary offering and a secondary listing in India with its legal and financial advisors. The company expects this to be a long process since the process of a primary offering and a secondary listing in India by an overseas company is complex and involves multiple steps. CTSH has not made a decision in this regard and any offering, and secondary listing would be subject to the market and other factors.
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