Indian IT stocks are experiencing a challenging period, marked by significant sectoral headwinds and the growing influence of artificial intelligence. The Nifty IT index has plummeted nearly 33% from its 52-week high, with several prominent companies reaching multi-year lows.
Q4 FY26 Results Disappoint Amid AI-Led Deflation
Kotak Institutional Equities reported that the Q4 FY26 results for Indian IT companies were mildly disappointing, deviating from a relatively stable performance in previous quarters. The analysis highlighted slight misses on growth targets, uninspiring Total Contract Value (TCV), and guidance that fell below expectations.
A key concern identified by Kotak is the emerging reality of GenAI-led revenue deflation, which is proving to be a substantial drag on earnings. While progress in AI-led opportunities is being made, it is not yet sufficient to counteract this downward pressure. Most companies marginally missed revenue growth estimates, signaling increasing demand stress across the sector.
Tier-1 vs. Mid-Tier Performance
Among Tier-1 firms, Tata Consultancy Services Ltd (TCS) led with 1.2% quarter-on-quarter growth, including 0.8% organic growth, followed by Tech Mahindra Ltd at 0.6%. Conversely, Infosys Ltd, HCL Technologies Ltd, and Wipro Ltd all experienced sequential revenue declines. In contrast, mid-tier companies generally outperformed their larger counterparts, showing growth rates between 1.2% and 3.4%, with Hexaware Technologies Ltd being an exception due to client-specific issues.
EBIT margins, however, saw year-on-year improvement for most companies, attributed to effective cost optimization strategies and the depreciation of the rupee.
Shifting Industry Landscape and Analyst Recommendations
PL Capital's recent report underscores a sharper AI challenge for the Indian IT sector. Enterprise engagements are becoming more dynamic as clients embed AI into their decision-making frameworks, increasing the demand for high-quality judgment at scale and reducing reliance on individual project deliveries. The industry is evolving towards more specialized, high-end work such as decision accountability, risk tiering, and AI governance.
Firms specializing in non-commoditized services, including data science and decision architecture, alongside those offering continuous-service models, are deemed better positioned as clients seek clearer costs and tangible value. Deal wins were mixed, with some companies reporting lower year-on-year TCV due to a high base, indicating that stronger new TCV growth is essential to offset deflation in existing business.
Guidance from most companies remains subdued, with HCL Tech, Infosys, and Wipro issuing lower-than-expected outlooks. Kotak has adjusted its FY2027-28 dollar revenue estimates for many firms downwards by 0-3.2%, though rupee depreciation has supported EPS upgrades.
Top Picks and Ratings:
- Kotak's Top Picks: TCS, Tech Mahindra, and Infosys among top IT firms; Hexaware and Coforge among mid-tier names.
- PL Capital 'Buy' Ratings: Coforge (Target: Rs 2,020), Cyient (Target: Rs 950), Infosys (Target: Rs 1,570), KPIT Technologies (Target: Rs 880), Latent View Analytics (Target: Rs 450), Mphasis (Target: Rs 3,000), Persistent Systems (Target: Rs 6,400), TCS (Target: Rs 3,450), and Tech Mahindra (Target: Rs 1,660).
- PL Capital 'Hold' Ratings: Fractal Analytics (Target: Rs 1,040), L&T Technology Services (Target: Rs 3,610), LTM (Target: Rs 4,560), Tata Elxsi (Target: Rs 4,800), Tata Technologies (Target: Rs 560), and Wipro (Target: Rs 200).
- PL Capital 'Reduce' Rating: HCL Technologies (Target: Rs 1,300).