Indian IT sector recovery deferred to FY26, says Kotak Equities
NEW DELHI, INDIA — The Indian IT sector’s recovery expectations have been postponed to fiscal year 2026 in the wake of recent stock corrections, according to analysts at Kotak Institutional Equities.
Subdued earnings and muted growth
The Indian IT services sector reported lackluster earnings for the fourth quarter of FY24, characterized by subdued revenue growth. Analysts attribute this to a weak demand outlook and macroeconomic uncertainties, which have now extended the recovery timeline to FY26.
Despite the ramp-up of large deals and reversals from furloughs, the overall discretionary spending environment remained restrained, leading to disappointing revenue growth guidance for FY25 across the board.
Margin and guidance reset
The extended outlook for weak demand also necessitated a reset in growth and margin expectations for FY25.
While companies like Tata Consultancy Services (TCS) and Wipro managed to improve margins through cost-optimization efforts, mid-tier firms such as LTIMindtree and Persistent Systems face reduced margin outlooks due to aggressive market share investments.
Infosys and TCS showcased solid bookings through large deals, contrasting with the muted total contract value (TCV) reported by Wipro and Tech Mahindra.
Kotak Equities’ top picks unchanged
Despite the market volatility during the earnings season, Kotak Equities maintains its preference for Infosys, TCS, and HCL Technologies among Tier-1 IT companies, with Cyient leading its mid-tier recommendations.
Infosys, in particular, is highlighted for its growth visibility in FY25, attributed to significant deal wins in recent quarters.
The firm notes that while stocks like LTIMindtree and Persistent Systems have seen price corrections, they remain on the expensive side, suggesting that further price adjustments could enhance their investment appeal.
“Companies indicated slowdown in decision-making and spending reprioritizations by clients as reasons for muted TCV. Most of the large deals involved cost take-out themes,” Kotak Equities remarked, underscoring the cautious spending behavior among IT service clients.
While the IT sector faces delayed recovery prospects, Kotak Equities sees a silver lining in the form of attractive stock valuations, particularly if further corrections occur.
This presents a nuanced investment landscape, with select companies poised for disproportionate benefits as the market conditions evolve.
