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4QFY25 Preview: Defer or de-rail?

A weak 4Q was in the guide. Elevated uncertainty – both regulatory and economic – means actual performance could turn out to be weaker. As we noted in Cloud (of the wrong variety) on the horizon?, there have been sporadic instances of pauses, even ramp-downs through the quarter. We therefore expect the companies (who guide) to be in the bottom-half of their guided band. Overall, we expect (1.4)-0.2% cc QoQ growth for large-caps. Mid-caps under coverage should do better (0.6-3.3%). KPIT, among Auto ER&D, will likely grow 3% cc, defying the gloomy environment. Clients’ CY25 IT budgets, as alluded by Accenture (ACN US; Not Rated), are likely flat. Discretionary spend still constrained. Rising uncertainty, especially with reciprocal tariffs about to be rolled out, could colour players’ outlook – and guidance. We expect INFO’s FY26 guidance to be 3-5% cc. HCL could guide 3-5% too, but aided by 1ppt in-organic contribution. The key questions investors need answer to is whether the current uncertainty will defer or derail the recovery. We refer back to our excess IT spend and US Bank’ spend normalisation thesis (exhibit 7-10). We are, at this stage, leaning towards the “defer” argument. However, till the clarity emerges, we advise sticking to players with valuation comfort (TCS/INFO) and earnings visibility (TCS, TECHM). Mid-caps, with growth momentum and recent correction, offer healthy upside

* 4QFY25 revenue growth –Mixed: We expect large-cap IT Services players (top-6) to report -1.4%to +0.2% cc QoQ growth in 4Q. USD revenue growth could be lower by 20-50bps. 4Q growth across large-caps will be hindered by both sectoral as well as specific factors, we believe. Lower working days and a still constrained discretionary environment apply to all. Additionally, there are specific headwinds for INFO (normalisation of third party items for sales), TCS (BSNL ramp-down), HCL (Verizon anniversary + Retail/CPG project completion), TECHM (low margin project termination) and LTIM (productivity pass-back to the top-account). Among mid-caps, momentum for PSYS (3.5%), Coforge (3%) and Mphasis (3.1%) should sustain. KPIT will likely be the only exception among Auto ER&D players to report positive growth (3%), underlining its execution rigour.

* Margins – takes outweigh puts: We expect top-6 players to report (120)-10 bps QoQ margin expansion. Barring USD-INR depreciation (tailwind) and lower working days (headwind), each player is battling its own set of puts and takes. For TCS, benefit of BSNL ramp-down is offset by reinvestment into talent and infra. INFO has to deal with wage hike, visa cost, higher marketing expenses which will be partially offset by lower cost of third party items (COT). HCLT’s margin will be weighed down by lower software sales and partial wage hike. LTIM’s change of guard, apart from weakness in Hi-Tech (higher margin segment) could delay recovery. TECHM should absorb wage hike impact through project Fortius. Mid-caps should do better. Auto ER&D’s margins will likely be flattish.

* Outlook, guidance and things to watch out: With recovery in discretionary spend less visible, spotlight will be back on larger deals (Exhibit 6). TCS (Coop Denmark, Northern Trust) and WPRO (Phoenix Group) have likely done better this quarter among large-caps. Among mid-caps, Coforge, on the back of USD 1.56bn TCV Sabre deal, could report USD 2bn+ TCV, substantially improving its FY26 revenue visibility. Mphasis and KPIT’s deal momentum should sustain. We expect 3-5%, 3-5% and 12-14% cc YoY revenue growth guidance from INFO, HCLT and KPIT respectively. WPRO could guide for -1% to +1% cc QoQ for Q1FY25. Any slowdown in US BFSI could be concerning. Current environment limits visibility. But our baseline hypothesis is deferral in spend, instead of curtailment. Large-deal led growth however means margin pressure may not relent.

* Cut FY26E revenues/PE multiples: We have lowered our FY26E cc revenue growth for top-6 from 4.4-7.8% earlier to 2.7-5.8% now. For mid-caps, estimates are largely unchanged. EPS changes track top-line estimates. We cut PER multiples across the board to account for lower visibility. Players with healthy order book (TCS, INFO, PSYS, COFORGE) should see lesser revenue variability, in our view. FY26 earning resilience will however be higher where margin outlook is strong (TCS, TECHM). These two are our preferred large-cap picks. Among mid-caps, we see value emerging in Mphasis.

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