IT Services Sector Update : Midcaps to outperform By Elara Capital
Midcaps to outperform.
Within our mid-cap IT universe, we expect COFORGE to post strongest sequential USD revenue growth to be aided by continued robust deal execution and partial numbers from the Sabre deal. PSYS, LTIM and MPHL are likely to post USD revenue growth in the range of 1.0-3.5%. Among large caps, except INFO, others are likely to post a sequential revenue decline in constant currency (CC) terms. Due to cross-currency tailwinds, they are likely to post USD revenue growth sans WPRO. The disruption caused by tariffs is likely to impact companies with higher exposure to manufacturing and retail verticals. We are likely to see strong deal momentum across compani+es and cost take-out deals will continue to dominate. We expect INFO to continue with 0-3% revenue growth in CC in FY26E while we do not see any change in HCLT revenue growth guidance of 2-5% for FY26 in CC. INFOSYS and HCLT are likely to continue with FY26E EBIT margin in the range of 20-22% and 18-19%, respectively. We prefer TCS, MPHL and LTIM based on valuation comfort.
COFORGE, PSYS to lead in revenue growth: COFORGE may likely post 6% QoQ revenue growth in USD terms, led by strong execution of deals as well as partial numbers from the Sabre deal. We expect PSYS to post QoQ growth of 3.5% in USD terms, aided by robust performance in BFSI and hi-tech. MPHL may post revenue growth of 1.0% QoQ to be aided by the BFSI vertical. LTIM is likely to post 1% QoQ CC growth for the quarter (1.5% QoQ growth in USD). TCS is likely to report a 0.5% CC QoQ decline (1% QoQ growth in USD) based on moderation of BSNL revenue and slower ramp-up of deals. INFO may report 1% QoQ CC revenue growth (2.5% QoQ growth in USD) on higher billing days and strong BFSI momentum. We expect WPRO to report a 2.5% QoQ CC revenue drop (1% QoQ decline in USD) based on continued weakness in some clients. HCLT may post a 0.5% QoQ drop in CC revenue (1% QoQ growth in USD) due to weakness in services. We expect TECHM to report a 0.5% QoQ CC revenue drop (1% QoQ growth in USD), due to continued weakness in hi-tech as well as seasonal weakness in the Comviva business.
Mixed bag for margin: We expect TCS to report a 20bp QoQ margin on cost moderation related to the BSNL project as well as deferment of wage hikes for Q1. INFO may see flat QoQ EBIT margin despite robust revenue growth due to the wage hike impact for the quarter for a few senior employees and large deal transition cost. For WPRO, we expect the margin to drop by 10bp QoQ despite weak revenue, due to continued work on cost optimization. HCLT may report a 90bp QoQ drop in Q1 margin, due to weak revenue, especially in its services part. TECHM margin may improve by 40bp QoQ on continued cost rationalization under project Fortius. LTIM may report a 40bp QoQ margin expansion on operating leverage. We expect PSYS to report a 40bp QoQ rise in EBIT margin to 16%, as wage hike cost is likely to hit in Q2. COFORGE may report a 20bp QoQ improvement in EBIT margin. MPHL should post a 10bp QoQ margin improvement.
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