IDBI Capital expects a relatively quiet Q2 FY27 for Indian IT services companies, with muted volumes and cautious client spending limiting growth despite currency support and some margin recovery. Among large-cap names, IDBI Capital prefers Tata Consultancy Services and HCLTech. For TCS, the brokerage forecasts dollar revenue growth of 0.5% QoQ and expects EBIT margin to improve by 44 basis points sequentially to 24.4%. IDBI Capital remains cautious on Infosys, where pricing pressure could weigh on margins, while Wipro continues to face growth challenges.
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IDBI Captial Report
IDBI Capital expects the September-quarter earnings season to remain subdued for Indian IT companies, even though Q2 is typically a seasonally strong period. The brokerage said macro uncertainty, pricing pressure and slower conversion of mega deals could restrict dollar revenue growth for large-cap IT companies to around 1%, while a weaker rupee and reversal of wage-hike costs may provide some support to reported earnings and margins.
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Among large-cap names, IDBI Capital prefers Tata Consultancy Services and HCLTech. It sees HCLTech delivering the strongest sequential operating momentum, supported by Jaspersoft, the HPE telecom business and seasonal strength.
TCS, meanwhile, is viewed as the better value proposition, with AI-led services supporting demand and margins expected to recover as wage-cost pressures ease.
For TCS, the brokerage forecasts dollar revenue growth of 0.5% QoQ and expects EBIT margin to improve by 44 basis points sequentially to 24.4%. HCLTech is expected to deliver stronger dollar revenue growth of 3% QoQ, alongside a 74-basis-point improvement in EBIT margin to 17.6%.
IDBI Capital remains cautious on Infosys, where pricing pressure could weigh on margins, while Wipro continues to face growth challenges.
Mid-tier IT companies are expected to outgrow their larger peers, although the brokerage cautioned that acquisitions are boosting headline growth at some companies, making the quality and sustainability of growth an important factor to watch.
Coforge and Sonata Software growth comes largely from Encora and the domestic business respectively, so the quality of growth matters more than the headline. Weak spots include Birlasoft's soft YoY revenue and Zensar's margin slippage, highlights the brokerage.
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Among mid-IT teers Cyient and Birlasoft are the brokerage's preferred bets.
Cyient has real momentum in transportation and mobility, TAO Digital adds scale, and margins improve both QoQ & YoY; the test is large-deal execution and integration.
Birlasoft, on the other hand, is a contrarian Buy as IDBI Capital sees improving deal activity in BFSI and life sciences, a cheap multiple of about 12.2 times and sizeable upside offset patchy energy and manufacturing demand, though the pipeline must convert into revenue.
Coforge is the best growth story but, at about 33.3x earnings, is fully priced, adds the brokerage.
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