~26% correction in the IT index on YTD basis (CY25) captures the concerns of US economy slowdown. Near-term headwinds (delayed decision making, trade war, and slower Fed rate cut cycle) are staying for a while now. Valuations for Tier-Is retraced now to 10yr mean factoring in ~3-8% USD revenue growth in FY26; among Tier-IIs Persistent and Coforge will lead the pack with double digit growth and hence commands valuation premium. To factor in this we trim USD revenue estimates for our coverage basket by 0-5%.
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Nirmal Bang Report
Q4 growth to be sluggish for the Tier-I's, while outperformance for Tier-II will continue on growth parameters. A cautious demand narrative and conservative guidance for FY26 may mark the following earning season.
Discretionary spending recovery is under pause again with new uncertainties from US tariffs roll out which will lead to rising trade war and slower Fed rate cut cycle. This will keep the clients for most of our coverage universe under the wait and watch mode. Noting the uncertainty, FY26E could end up similar to FY25 leading to a cut in earnings estimates for our coverage universe for FY26-27E.
Operating margins' resiliency to continue sequentially but to stay weak on YoY basis. However, divergence in Ebit margin performance will be there due to a mismatch in timings of wage hikes and seasonality. Tier-II's to deliver steady to strong margin performance for Q4.
Street expectations already factor in a weaker FY26, taking the valuations to a 10yr mean for our coverage universe. We model -1% to 0.6% CC revenue growth in Q4 for Tier-Is and Management commentary on deal conversions, hiring, and AI monetization will be closely tracked.
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