IGI Logo

Indian IT: Navigating headwinds

Expect subdued commentary on demand

* We expect 2QFY26 to be a muted quarter for IT services, with no material improvement over the past quarter. As clients reel under macro and tariff uncertainty, we believe there is hesitation to commit additional dollars to any large initiatives. We expect 2Q numbers to reflect this, with QoQ cc growth expected in the range of 0.3% to 2.4% for large-caps and mid-caps expected to outperform once again with a growth range of -0.5% to 6.0%. For 2Q, we expect aggregate revenue for our coverage universe to grow by 6.0% YoY, while EBIT and PAT are likely to grow by 5.2% and 5.5% YoY (all in INR terms), respectively.

* FY26 is unlikely to see significant acceleration vs. FY25, in our view. Further, FY27 acceleration will depend on the trajectory of deal wins in the next 2-3 quarters, posing a risk to street estimates. Meaningful macro improvements and sustained earnings upgrades are likely to materialize only once the next tech cycle arrives, which we expect to be 15-18 months away (see our note dated 19th Sep’25: GenAI and IT Services: The waiting game). Unlike past transitions when digital or cloud spending offset legacy drag, this cycle lacks a budgetary kicker.

* Among verticals, we expect BFSI to remain resilient through FY26. Auto OEMs are adjusting to tariff risks, but spends remain elusive. Retail faces margin pressures and H1B constraints, and Healthcare continues to deal with US policy uncertainty.

* Margins: We expect margins to remain range-bound and supply-side pressures to stay muted; however, meaningful margin gains are limited ahead as they are being impacted by multiple fronts, including pricing, change in delivery models, client behavior, and the GenAI transition.

* We expect the ER&D space to remain under pressure in 2QFY26, primarily due to near-term capex moderation by Western OEMs and slower EV/SDV project ramp-ups. That said, we expect 2H to see pent-up spending, with delayed projects picking up and growth from China and India helping offset weakness in Europe and the US, partially.

* As argued in our note (dated 29th Jul’25: IT Services: In Limbo), a major re-rating for the sector hinges on the emergence of a new tech cycle and meaningful earnings upgrades. The top 4 IT services names are trading at their average 10- year P/E and a 16% discount to their average 5-year P/E. There is room to expand if earnings and outlook spring a surprise.

Growth expectations across our coverage

* We expect revenue growth of 1% QoQ CC for TCS and 1.7% for HCLT. BSNL ramp-up for TCS is likely to occur from 3QFY26. INFO is likely to report 2.4% QoQ CC growth, driven by deal ramp-ups, seasonally better 1H and a partial contribution from an acquisition. WIPRO is likely to report 0.3% QoQ CC, slightly above the mid-point of guidance, supported by inorganic contributions. TECHM is expected to post 1% QoQ growth, while LTIM is likely to report 2% CC growth, aided by the agri-deal ramp-up.

* Among mid-tier firms, we expect COFORGE to be at the forefront with ~6% cc QoQ revenue growth, driven by steady ramp-up of the Sabre deal and execution of large deals. PSYS/HEXT are also likely to deliver 3.5%/3.3% cc QoQ growth. Mphasis is anticipated to report 1.5% CC growth.

* Among ER&D names, we expect a gradual recovery from 3Q onward. KPIT is expected to report flat QoQ CC growth due to lower contributions from Caresoft than expected, while TTL/TELX /LTTS are likely to report 1.5%/1% /1% CC growth.

* We expect Cyient DET to report 0.5% CC growth, as some stabilization is expected. We are factoring in a cross-currency tailwind of ~30-50bp for most companies.

Expect limited margin gains sequentially

* We expect TCS EBIT margins to decline by 20bp QoQ due to a one-month impact of wage hikes and lower utilization. HCLT’s margins are expected to improve by 50bp despite GenAI and SG&A investments and restructuring costs. Infosys may see a 40bp improvement, driven by realization tailwinds and the absence of wage hikes. While Infosys has additional levers, industry-wide pricing pressure could limit margin gains.

* TECHM and LTIM are likely to report 50-60bp of margin improvement. For TECHM, lower subcontractor costs and SG&A efficiency are expected to drive margin gains, while LTIM should benefit from cost actions and moderation in SG&A.

* Among mid-caps, Coforge margins may rise to 14.0% (up 80bp QoQ) as ESOP costs taper and D&A normalizes. HEXT margins are expected to normalize after 1Q one-offs, supported by tapering ERP costs and a better offshore mix.

* Cyient DET margins will expand 60bp in the absence of wage hikes.

* For ER&D companies, margins are estimated to remain stable with no material expansion, except for TELX, which should see sequential gains after a depressed 1Q.

TECHM and COFORGE remain our top picks

* We continue to prioritize a bottom-up play in IT: TECHM and HCLT in large-caps and COFORGE and HEXT in mid-tier.

* We prefer TECHM, as we see early signs of transformation under the new leadership and improving execution in BFSI. We believe TECHM’s transformation remains relatively decoupled from discretionary spending. We continue to like HCLT for its all-weather portfolio.

* In mid-caps, Coforge and Hexaware remain our top picks. The previous downcycle showed that mid-tier firms can thrive in cost-focused environments. Coforge’s Sabre deal shows mid-tier companies now have both scale and solution maturity to win cost-saving deals. Hexaware, meanwhile, is gaining share through consolidation deals in Financial vertical. As pressures in large accounts appear to be tapering, an improving margin trajectory bodes well for the company.

For More Research Reports : Click Here 

For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412