TCS, Infy, HCL Tech, Wipro; KPIT Tech, Cofogre: Q3 preview for IT stocks, targets & more

Nirmal Bang Institutional Equities expects the Indian IT sector's third-quarter results to reflect muted revenue growth, with Tier-I companies likely to report flat constant currency growth between -1.4% and 1.5%. Tier-II firms could see slightly higher growth at 0.5% to 3.0% due to improved total contract value (TCV) performance. Growth is supported by ongoing cloud migration and AI-driven deals, but headwinds remain in the consumer, telecom, manufacturing, and Hi-tech verticals, mainly because of continued furloughs and client delays.

Engineering, research and development players are expected to remain under pressure, facing tariff-led uncertainties. Original equipment manufacturers have delayed new project decisions and the ramp-up of previously signed deals. Nirmal Bang projects ER&D firms will deliver only around 0.5% constant currency growth for the quarter, though currency tailwinds could partially offset this, given high US exposure.

Margin performance is set to be challenging, as wage hikes in the third quarter and spillover from Q2 add to seasonal pricing pressures and increased subcontractor costs. Local hiring is on the rise and, while cost controls and margin expansion initiatives are in place, overall profitability could continue to be squeezed. However, a more stable regulatory environment in the US should aid margin stabilisation going forward.

TCV for the industry is expected to remain range-bound, with most IT players likely to announce steady numbers. The resolution of uncertainties, including those related to tariffs and H1B visa costs, has enabled the closure of some deals previously paused in the first and second quarters. TCV is expected to be skewed towards large deals, while discretionary spending and smaller contracts are anticipated to remain subdued.

Nirmal Bang identifies several key industry focal points: the state of incremental spending, updates on client budgets, trends in discretionary spending, demand across verticals such as BFSI, Hi-Tech, Manufacturing, and Healthcare, and the possible impact of global capability centres on outsourcing businesses. The firm also points to cautiousness in forecasts for calendar year 2026, suggesting meaningful growth may not materialise until 2027.

The report highlights the growing interest in Gen AI projects and questions how much revenue and cost savings these initiatives might deliver for IT firms. Nirmal Bang queries the source of funding for such projects and notes that companies may need to reprioritise budgets as demand for Gen AI scales. The possibility of workforce downsizing and its effects, particularly among large players like TCS, is also under scrutiny this quarter.

Key issues to watch for Tier-I and Tier-II players include signals of any recovery in discretionary spending, the ongoing challenge of TCV-to-revenue conversion, and the execution status of mega and large deal ramp-ups amid recent project cancellations. Additionally, the evolution of service delivery models in response to rising visa costs and the resultant trends in offshoring and near-shoring will be closely monitored across the sector.

Nirmal Bang has a 'buy' rating Tata Consultancy Services Ltd (Target Price: Rs 3,861) and HCL Tech (Target Price: Rs 1,727) from the largecap pack. It has given same rating to Persistent Systems Ltd (Target Price: Rs 6,711), Coforge Ltd (Target Price: Rs 2,158) and KPIT Tech (Target Price: Rs 1,565) from the midcap and smallcap pack. Tata Elxsi is the only IT stock with a 'sell' rating with a target price of Rs 5,186.

It has given a 'hold' rating to Infosys Ltd (Target Price: Rs 1,677), Wipro Ltd (Target Price: Rs 290), LTI MindTree Ltd (Target Price: Rs 5,697), Tech Mahindra (Target Price: Rs 1,674), Mphasis Ltd (Target Price: Rs 2,849), Birlasoft Ltd (Target Price: Rs 366), Zensar Technologies (Target Price: Rs 805) and Tata Technologies Ltd (Target Price: Rs 797).