IT Sector Update : 1QFY26E preview: Not as bad as by Kotak Institutional Equities
We believe that the quarter will be a mixed one, with mid-tier IT services companies reporting strong growth, while large IT companies and ERD names will disappoint. We expect in-line EBIT. Deal wins will be strong, although not necessarily net new for the industry. Coforge, in our view, will lead the growth, followed by Persistent, Hexaware and Mphasis. TCS, Wipro and ERD names will likely face cuts in EPS after results. Infosys, Tech Mahindra, Hexaware, Coforge and Indegene are our key picks.
Weak numbers for Tier 1 IT; huge cross-currency tailwinds
Exhibit 1 details cross-currency tailwinds for our coverage universe that range ~70-300 bps, resulting in strong USD growth qoq. The disruption caused by the imposition of reciprocal tariffs by the US will impact spending in manufacturing and, to a lesser extent, in retail verticals as well. Expect muted revenues for tier 1 names: 4 of the 5 large IT companies are expected to report sequential declines, while revenues for the entire Tier 1 will likely slow down to low-single digit growth to decline in c/c on yoy comparison. TCS, Tech Mahindra and Wipro will likely disappoint, while Infosys and HCLT will likely report in-line numbers. The positive, in our view, is demand deterioration has been consistent with the companies’ expectations, although a bit lower than Street expectations.
Mid-tier names motor along
Smart deal structuring, share gains and favorable portfolio (low manufacturing exposure) will drive strong growth for mid-tier, with Coforge (+6.4% qoq) and PSYS (+4.1% qoq) leading the way. Hexaware (+2.5% qoq) and Mphasis (+1.4% qoq) will also likely report a strong quarter. Expect strong growth for Coforge, PSYS and Hexaware for FY2026E.
EBIT margins—broadly stable
In our view, EBIT margins will be broadly stable for large companies, while they will expand for select mid-tier ones. Companies have stretched every lever to defend margins, including tight control on travel, other discretionary costs and in a few cases pulling back variable compensation. Companies may need discretionary spending recovery to defend margins in the medium term.
Guidance—not much of change
We expect Infosys to raise FY2026 revenue growth guidance to 1-3% from 0-3% earlier, after baking in ~40 bps from the MRE and The Missing Link acquisitions. HCLT will likely retain 2-5% revenue growth guidance for FY2026, with the full focus on closing large deals that underpin the upper half of the guidance. Wipro’s revenue growth guidance for 2QFY26 will move to flat revenues, at the midpoint of -1 to +1% from a sharp decline in the June 2025 quarter.
Mixed demand environment: Stay selective
An unchanged demand environment can protect current FY2026 revenue growth assumptions for Indian IT and perhaps lead to upsides for a few. Infosys, Tech Mahindra, Hexaware, Coforge and Indegene are our key picks.
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