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4QFY25 Review: A Tarrific quarter

IT Services’ 4QFY25 results were weak, as anticipated. Top-6’s revenues declined 0.6-3.5% cc QoQ, with five out of the six missing estimates. Elevated uncertainty towards quarter-end compounded an already weak set-up – lower working days, higher third-party items in the base etc. Players’ outlook, at the time of earnings, came against the backdrop of unprecedented tariff-war. Unsurprisingly, they cited limited near-term visibility, with WPRO guiding for a -3.5% to -1.5% cc QoQ growth for 1QFY26. Their full year outlook was however resilient. INFO and HCL’s FY26 guidance imply 0.4-1.9% CQGR, decent given the circumstances. TCS also indicated a better FY26 (ex-BSNL). This outlook, we believe, stems from their record order-backlog. Top-6 have won TCV (as reported) of c.USD 180bn over past two years, at a book-to-bill of 1.07x. Actual book-to-bill will be higher as not all disclose full TCV. A thaw in US-China trade-war since then should further improve sentiments. That said, uncertainty could sustain unless clarity emerges on long-term tariff levels, thus keeping decisions on large transformation projects in limbo. Also, rush to push forward imports could divert resources towards working capital, impacting IT Services spend in the near-term. Moreover, (1.5)%-17% PER movement FYTD (for top-6) suggests tariff pessimism is already reversed. Stock performance from hereon should therefore track earnings upgrade. We prefer INFO/TCS among large-caps, HEXT/COFORGE among mid-caps and KPIT among ER&D

* 4QFY25: Growth divergence among large and mid-caps continued. Top-6 reported 0.6- 3.5% cc QoQ decline. Only HCL exceeded expectations. Mid-caps under coverage grew (0.2)%-4.2% cc QoQ, with two out of four beating estimates. Large-cap growth was impacted by lesser billing days, lower third-party revenues (INFO, TCS, LTIM), clientspecific factors (HCL – Retail; TECHM – Hi-Tech). Mid-caps, on the other hand, grew on the back on recent deal ramps. Auto ER&D growth (TATATECH/KPIT) met expectations, a positive. So did BPO players. Margins were in-line, across cohorts, except IKS which beat.

* Deals – unyielding competition: Book-to-bill, for players who report full TCV, ranged from 1.4-1.6x (ex-Coforge). Our analysis of deal TCV share indicate that on an LTM basis, TCS, WPRO and Capgemini (CAP FR, NR) have ceded market share to Accenture (ACN US; NR), Cognizant (CTSH US; NR) and LTIM. TCS’ healthy 4Q TCV helped it win back some share though. Large deal wins by mid-caps (MPHL, COFORGE, HEXT), few even against larger incumbents, indicate heightened competitive intensity. Players will need to walk a tightrope between protecting/expanding wallet share and managing margins.

* Outlook – Banking on backlog: Most players sounded upbeat about full year prospects, even as they flagged off limited near-term visibility. WPRO guided for a soft -3.5% to - 1.5% cc QoQ growth for 1Q. TCS mentioned that 1Q visibility is lower compared to previous years. It however expects ex-BSNL growth in FY26 to exceed FY25’s. INFO’s FY26 guidance was 0-3%, which, given a weak 4Q exit (-3.5%), implies 0.7-1.9% CQGR. HCL’s 1-4% organic cc growth implies 0.4-1.1% CQGR. LTIM/TECHM’s outlook hinges on their transformation progress. MPHL/Coforge expects FY26 growth to be better than FY25’s. HEXT expects growth to accelerate through the next two quarters. PSYS remains on track to hit USD 2bn ARR by 4QFY27. KPIT was the only one to suspend guidance.

* Earning cuts across the board: Consensus (VisibleAlpha) cut its FY26-27E EPS for largecaps by 2-7% post earnings (Exhibit 30). Cons. cuts were highest in LTIM, though still remains above JMFe. Among mid-caps, our EPS cut was higher for PSYS vs cons. as we see growth-margin trade off ahead. For KPIT, our earnings actually went up, aided by favourable cross-currency movement, something we believe the Street has missed.

* Sector view - premature to go over-weight: NIFTY-IT is up 4% FYTD, scaling back the preLiberation Day level. EPS cuts mean valuations are up by (1.5)%-17%. While a bounce back from peak-pessimism scenario is justified, we still don’t have evidence to argue for re-ratings from current levels. Moreover, short-term decisions around tariffs could impact spend patterns. We therefore don’t see guidance upgrades at this stage. Among largecaps, stick with players that offer valuation comfort. TCS/INFO fall in that category

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