Q3 IT preview: Coforge, Persistent may lead growth; TCS, LTIM, Tata Elxsi, KPIT may disappoint

In its December quarter (Q3) IT earnings preview, Kotak Institutional Equities expected most IT services companies to report an acceleration in growth rates on year-on-year (YoY) basis, albeit a gradual one. Sequentially, ii believes growth should be lower, but far better than last year due to lower furloughs.

"In our view, growth will be aided by core modernisation, cloud and data from a horizontal standpoint, and financial services from a vertical standpoint. The manufacturing vertical is expected to be weak," it said.

Coforge Ltd, Persistent Systems Ltd and HCL Technologies Ltd are expected to lead the growth, with 4.7 per cent, 4.7 per cent and 4.4 per cent, respectively. Tata Consultancy Services Ltd (TCS) (0.1 per cent) and Mphasis Ltd (0.8 per cent) will report muted quarter, Kotak said. It believes that LTIMindtree Ltd will likely report reasonable growth despite weak hi-tech. Infosys is seen delivering 0.7 per cent growth and Tech Mahindra Ltd (TechM) 0.5 per cent growth.

"Sporadic incidents of pricing pressure and composition of revenues should lead to disappointments in margins for a few. We forecast 180 bps QoQ and 170 bps YoY declines in EBIT margin for LTIM. TCS’ EBIT margin will barely improve QoQ and decline 60 bps YoY. For others, we expect EBIT margins in a narrow range. A recovery in discretionary spending is a critical margin tailwinds," Kotak said.

The brokerage expects Infosys to raise revenue growth guidance to 4.5-4.75 per cent from 3.75-4.5 per cent while it sees EBIT margin guidance for Infosys to stay unchanged at 20-22 per cent. It expects HCL Tech to raise organic revenue growth guidance to 4.5-5 per cent and retain the EBIT margin guidance band of 18-19 per cent. Wipro should guide for a better Q4 of
0.5 per cent degrowth to 1.5 per cent growth.

Meanwhile, Kotak said a broad-based slowdown in the automotive industry has led to deferrals or cancellations of programs by OEMs. Auto OEMs across the US and Europe have been impacted by a slowdown in demand, slower-than-expected adoption of EVs and competition from Chinese OEMs.

"Other verticals in ERD are also slowing down. We forecast weak growth for Tata Elxsi, Tata Technologies and KPIT. LTTS might lower FY2025E organic growth guidance to 7-8 per cent. Cyient should report a better quarter after multiple quarters of disappointments," it said.

Demand recovery is visible even as the pace is gradual. The Street is forecasting a normalisation of growth rates in FY2026.

"The momentum in BFS is robust so far, but we are less sure of other verticals. Demand for cost take-outs and modernization of the core continues to be strong. The market is conducive for companies with a strong track record of execution and an ability to cater to both cost take-outs and discretionary spending. Infosys, TCS, Coforge and TechM are our top picks," Kotak said.