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Tempered expectations

We expect cautious FY26E guidance amid an uncertain backdrop

* As we argued in our previous report (Recovery stuck in second gear dated 11th Mar’25), the discretionary spending recovery that we saw picking up in 1HFY25 has been stuck in the second gear; and clients are likely to be in wait-and-watch mode as they take stock of the trade war, a slower Fed rate cut cycle, and other macro-economic risks. The net result of this will be a stop-start recovery in discretionary spending, pegging FY26E revenue growth for most large-caps in the range of 2-5% in constant currency (CC). There are three key questions that we would like to address: 1) Is there an upside risk to FY26 growth estimates? 2) Is feeble large-cap growth already in the price? and 3) Is further de-rating possible if the trade war escalates and US/Europe macro worsens?

* Is there upside risk to growth estimates? As shown in Exhibit 6, deal TCV for FY25E for most large-caps could be down 15-25% vs FY24 (Infosys at -32% and TechM at +34% stand out). This most likely entails an inferior 1HFY26 vs. 1HFY25, and unless deal activity meaningfully accelerates in 1HCY25, the upside risk to FY26 estimates is limited.

* Is the lower growth already priced in? We believe the growth deceleration is largely priced in, but we note that the NSE IT Index currently trades at a 28% premium to the Nifty (5/10-year avg of 29%/14%), and any re-rating is contingent on earnings beat.

* Is further de-rating possible? We believe most large-caps are trading at 5-year average PE multiples, and further de-rating is unlikely.

* All eyes now will be on FY26 guidance; we expect Infosys to guide for 2.5%-5% CC growth for FY26; and expect HCLT's top end to be in a similar range.

* For 4Q, we expect aggregate revenue for our coverage universe to grow by 7.8% YoY, while EBIT and PAT are likely to grow at 7.1% and 5.7% YoY (all in INR terms).

* Cross-currency impact for 4Q: On an average, we expect ~50-80bp crosscurrency headwinds for our coverage on a sequential basis.

* We expect revenue growth of Tier-I companies to be in the range of -1.0% to flat QoQ CC. Revenue of Tier-II players is expected to grow to the tune of -0.5% to ~5% QoQ in CC terms.

Growth expectations across our coverage

* We expect INFO and TCS to report a revenue decline of 1.0% and 0.5% QoQ cc, respectively, whereas HCLT is anticipated to clock a 0.6% decline in 4QFY25, driven by tapering of deal ramp-ups in telecom and seasonal weakness in the P&P segment. Meanwhile, TECHM is likely to post a 0.8% QoQ revenue decline and Wipro may report flat revenue QoQ. LTIM could deliver 0.2% QoQ cc growth despite productivity pass-back in a key account spilling into 4Q. ? Among mid-tier firms, we expect LTTS to lead the pack with ~15% cc QoQ revenue growth (organic growth of 7%), driven by broad-based growth and inorganic contribution from Intelliswift. Persistent/Coforge are also likely to deliver 4.0%/3.0% cc QoQ growth, while Mphasis could post 3.0% cc QoQ growth.

* We expect Cyient DET to report yet another weak quarter, with flat QoQ revenue. The company may fall short of its revised FY25 guidance of ~2.7% YoY cc decline due to challenges in its key vertical. We are factoring in a modest cross-currency headwind for most companies (~50-80bp impact).

Margins to remain range-bound this quarter

* We expect TCS EBIT margins to remain flat QoQ despite BSNL ramp-down owing to headwinds from talent investments. HCLT’s margins may decline ~190bp, led by wage hikes (50-60bp), slower growth, and decline in the high-margin P&P segment. Infosys may see a 70bp dip due to wage hikes and visa costs, partially offset by cost optimizations and lower third-party spend.

* LTIM margins are likely to stay flat at 13.8%. Wipro margins should remain around 17.0-17.5%, with no major headwinds.

* The net headcount addition would be lower across the board, owing to a muted demand recovery.

* Among mid-caps, Coforge margins may rise to 12.9%, supported by lower merger costs and operational gains. Cyient DET margins are likely to be ~13.5%, revised down from 16% due to delayed revenue realization. LTTS may see a 90bp QoQ margin dip, driven by Intelliswift consolidation (150bp impact) and SG&A investments.

TECHM and COFORGE remain our top picks

* We prioritize correct positioning over predictability, favoring bottom-up transformation and margin-driven stories over top-down discretionary names.

* Among Tier-I players, we prefer TECHM, driven by early signs of transformation under new leadership and improving execution in BFSI. Margin expectations are now more reasonable, and niche offerings are resonating well. We believe TechM’s transformation remains relatively decoupled from discretionary spends. With further scope for telecom recovery and operational efficiency, we see room for sustained margin improvement going forward. We continue to like HCLT for its all-weather portfolio, and believe TCS offered a fair risk-reward balance.

* Among Tier-II players, our top pick is COFORGE. Its strong offerings in BFS and insurance should enable it to participate in a demand recovery, and a strong TCV also indicates a robust near-term growth outlook. We believe COFORGE’s organic business is in great shape and early cross-selling initiatives between COFORGE and Cigniti indicate that COFORGE could engineer a growth turnaround at Cigniti earlier than expected.

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