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Soft patch ahead

Guidance cuts and near-term headwinds in BSS lead to a cautious stance

* Updater Services (UDS) reported a 2QFY26 revenue growth of 7% YoY to INR7.3b, below our estimate of ~INR7.7b. Core EBITDA margin came in at 4.3% (est. 5.9%), down 130bp QoQ. Consolidated adj. PAT stood at INR198m (down 30% YoY), below our estimate of INR321m.

* UDS’s 1HFY26 revenue grew 7.3% YoY, whereas EBITDA declined 16.3% YoY. For 2HFY26, we expect its revenue/EBITDA to grow by 13%/1.0% YoY. We downgrade the stock to Neutral with a revised TP of INR 230, as weaker BSS trends (FY26 growth cut to 3–3.5%), lower overall guidance (9–10% vs. 13– 15% earlier), margin pressures from client issues, and ramp-up costs limit near-term visibility.

Our view: Softness in BSS and margin recovery key monitorables

* We believe growth momentum has moderated meaningfully this quarter, with management revising FY26 revenue guidance to 9–10% (from 13–15% earlier). While the IFM segment continues to add strategic contracts, we believe the ramp-up of several large wins has temporarily weighed on revenue conversion and profitability. Some contracts were also taken at lower initial margins given their long-term potential, which may limit nearterm margin recovery.

* The BSS segment remains the key drag, with FY26 growth guidance now pared down to just 3–3.5% YoY. We think global technology disruption and slower demand from IT and BFSI clients will keep the recovery gradual. Within the portfolio, performance remained uneven. Athena and Avon underperformed, the former impacted by increasing AI adoption and selective insourcing of operations by clients, while the latter faced stressed receivables that required provisioning of ~INR30m.

* Audit & Assurance business continued to perform steadily, expanding into high-value areas such as fixed asset verification and last-mile audits, which we see as important long-term margin levers. Meanwhile, the EBCG vertical remained weak, with hiring freezes by MNCs and spending cuts across Indian IT firms weighing on demand. Given these near-term challenges and the limited visibility for a sustained turnaround to prior levels, we expect BSS to remain soft through FY26, dragging on overall consolidated growth and margin performance.

* Margins: We expect profitability to stay under pressure due to client-specific issues in Denave, underperformance in Athena and Avon, and a less favorable sales mix. Upfront costs related to ramping up new IFM contracts and persistent BSS weakness (a higher-margin business) are likely to keep margins below last year’s levels. Management has guided for ~4% PAT margins for FY26; we estimate margins at ~4.0%/4.4% for FY26E/27E.

Valuation and changes to our estimates

* We cut our earnings estimates by 12%/8% for FY26E/FY27E to reflect the slower growth trajectory and margin pressures across both IFM and BSS segments. Management’s guidance downgrade to 9–10% growth for FY26 (from 13–15% earlier), coupled with persistent weakness in the BSS portfolio, suggests a more gradual recovery ahead.

* Key monitorables include margin normalization in IFM, receivable recoveries at Avon, and early signs of turnaround in BSS. Given limited near-term triggers, we downgrade the stock to Neutral with a revised TP of INR230, based on 11x Jun’27E EPS, implying an upside potential of 13%.

Miss on revenue and margins; 28 new logos added

* Revenue grew 7% YoY and 4% QoQ at INR7.3b, below our estimate of ~INR7.7b.

* Revenue growth was aided by 10% YoY growth in IFM, whereas BSS reported a growth of 2% YoY.

* EBITDA margin came in at 4.3%, down 130bp QoQ (vs. est. 5.9%). IFM’s PBT margin was flat QoQ at 4.5%. BSS’s PBT margin was down 160bp QoQ to 3.2%.

* Consolidated adj. PAT stood at INR198m (down 30% YoY), below our estimates of INR321m.

* RoCE stood at 13% on an annualized basis in Sep’25 vs 17.9% in Jun’25. The company added 28 logos during 2QFY26.

* Long-standing relationships with customers have 95% retention over a five-year window in both businesses.

Key highlights from the management commentary

* During the quarter, several new contracts were secured that are highly strategic in nature, strengthening long-term positioning with key clients and enhancing the company’s presence across focus sectors.

* These new contracts have led to upfront employee costs, as many remain in the ramp-up phase and have not yet reached their full revenue potential, impacting margins temporarily. Management expects the cost structure on these strategic contracts to normalize over the next few quarters. For FY26, revenue growth is expected to be in the range of 9–10%.

* Focus continues to shift toward private sector-led contracts, given their superior margin profile compared to government projects.

* The BSS portfolio, including Denave and Athena, witnessed headwinds from global technology and industry disruptions. Investments are being made in digital tools and automation to strengthen long-term resilience.

* Athena continues to navigate the evolving technology landscape. While increasing AI adoption has impacted some clients, expansion beyond BFSI into healthcare and education has provided diversification. Margins have remained stable.

* The EBCG vertical continued to face muted demand amid significant spending cuts by Indian IT companies and temporary hiring freezes by MNC clients. The company is expanding non-IT exposure to mitigate sector dependency.

Valuation and view

* We cut our earnings estimates by 12%/8% for FY26E/FY27E to reflect the slower growth trajectory and margin pressures across both IFM and BSS segments. Management’s guidance downgrade to 9–10% growth for FY26 (from 13–15% earlier), coupled with persistent weakness in the BSS portfolio, suggests a more gradual recovery ahead.

* Key monitorables include margin normalization in IFM, receivable recoveries at Avon, and early signs of turnaround in BSS. Given limited near-term triggers, we downgrade the stock to Neutral with a revised TP of INR230, based on 11x Jun’27E EPS, implying an upside potential of 13%.

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