Nuvama Institutional Equities has expressed a positive outlook on the Indian IT sector, naming Coforge Ltd, Mphasis Ltd, Hexaware, Firstsource, Tech Mahindra (TechM), LTM Ltd, Infosys Ltd, and Tata Consultancy Services Ltd (TCS) as its preferred stock picks. The brokerage believes that the IT services model remains robust and that the advent of Generative AI will unlock substantial opportunities for domestic IT giants.
Following a period of sharp correction and underperformance over the last six months, partly attributed to a negative narrative surrounding Gen AI platform companies and geopolitical uncertainties, Nuvama finds the valuations of IT stocks under its coverage highly attractive. The firm notes that these stocks are currently trading at extremely low terminal growth assumptions.
Market Outlook and Q1FY27 Projections
For the June quarter (Q1FY27), Nuvama projects that deal flows will remain decent for most companies despite a volatile demand environment. Margins across the sector are expected to be stable, with a currency tailwind offsetting potential impacts from wage hikes in some exceptional cases. Infosys is anticipated to upgrade its FY27 guidance to 2.5–4 percent (including 125 basis points inorganic growth) from its previous 1.5–3.5 percent. Most other companies are likely to maintain their guidance, though they may land below the midpoint.
Nuvama expects Q1FY27 to be a soft quarter overall, with growth affected by factors such as the Gulf War and revenue cannibalisation. Management commentaries are likely to reflect the multi-pronged challenges currently facing the sector.
Tier-1 and Tier-2 Performance Dynamics
Within Tier-1 companies, Infosys is projected to lead sequential constant currency (CC) growth at 2.3 percent, followed by Tech Mahindra at 1.2 percent. Tata Consultancy Services (TCS) is expected to remain stable with 0.1 percent growth. HCLTech and Wipro, however, are likely to report a sequential decline in CC sales, by 1.1 percent and 1.5 percent, respectively.
Tier-2 companies are anticipated to continue their outperformance. Hexaware Technologies is expected to lead with 4.4 percent CC QoQ growth, followed by Persistent Systems at 3.1 percent and Mphasis at 2.1 percent. LTIMindtree is projected to report relatively softer growth at 0.4 percent. Among ER&D players, L&T Technology Services is expected to grow by 1 percent CC QoQ, while Cyient may remain soft. In the small-cap segment, Firstsource Solutions is likely to lead with 2.2 percent CC QoQ growth, with Zensar Technologies and Birlasoft reporting flat to slight declines. Currency headwinds are estimated to be in the range of 10-40 basis points quarter-on-quarter.
Despite near-term volatility, Nuvama maintains a positive stance on the sector from a medium-to-long-term perspective, identifying exciting pockets of growth, especially within Tier-2 companies.