Whalesbook
Seasonal Slump Expected for Tech Giants
Indian IT companies are gearing up for a typically weak October-December quarter. Seasonal factors like holidays and client shutdowns are expected to mute revenue growth for large firms.
Tata Consultancy Services (TCS) is projected around 0.5% quarter-on-quarter in constant currency. HCLTech might lead large caps with nearly 3% growth, primarily from its products division. Other major players are likely to see low single-digit increases.
Mid-Caps Poised for Better Performance
Mid-cap IT companies show a different picture. Persistent Systems and Coforge are expected to deliver more robust growth, nearing 3.5%.
Demand Environment Remains Cautious
The broader demand environment remains steady but subdued. Cost optimization deals continue to drive business. Discretionary spending, however, stays weak.
Large-scale artificial intelligence (AI) monetization is still limited. Some improvement in auto technology spending has been noted, but broad impact is yet to materialize.
Valuations and Outlook
Financial Year 2025-26 (FY26) guidance is unlikely to see upgrades. Forecasts are expected to narrow within existing ranges.
Margins are anticipated to remain range-bound. A weaker rupee may offer some support, but it's not expected to significantly boost profitability.
The Nifty IT Index saw a gain of about 14% in the last quarter. Over the past year, however, it remains down by nearly 12%.
Valuations present a contrast. Large-cap IT stocks trade near their long-term averages. Mid-cap valuations, conversely, remain elevated due to their stronger growth prospects.
Yogesh Agarwal, Head of Research at HSBC India, noted the typical seasonal weakness. He expects this quarter not to significantly impact overall numbers or the long-term outlook.
Agarwal anticipates some positive commentary from management. He sees larger companies growing mid-single digits, while smaller firms can achieve faster growth.
This divergence suggests investors might find greater long-term compounding value in smaller IT companies. Their ability to grow at scale presents opportunities.