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What lies ahead for Indian IT: The good, the bad, and the unlikely

Of the 11 companies that have reported so far, 7 have missed revenue estimates; margin performance has been relatively decent, with ~70% of the companies beating or meeting expectations. That said, we have seen earnings cuts of 3-4% across our coverage universe, and in the meantime, the NSE IT index has still rallied ~9% since TCS kicked off the results season. Two things have possibly driven this: 1) earnings downgrades have been milder than feared, and 2) management commentary has remained broadly positive, particularly around near-term demand stability – especially in 1QFY26. We, however, believe that tariff risks have not fully been absorbed, and even if the tariff problem goes away, the sector is back to the base problem of a slower growth pick-up (refer to our report dated 11th Mar’25 - Recovery stuck in second gear).

As we look ahead, we outline three potential scenarios for the sector in the near term and highlight our preferred picks based on earnings resilience, relative valuations, and growth visibility into FY26.

Scenario 1 (normalized 1Q; US escapes recession; trade war de-escalates):

* This appears to be the base case implied by most earnings commentaries in 4QFY25: TCS was confident that trade war-related uncertainties will abate post 1Q, whereas Infosys expects normal seasonality in 1Q, implying a strong QoQ growth (refer to the details for 1Q comments in Exhibit 1).

* We believe the market is currently pricing in this scenario, and there is a risk that the commentaries may have slightly over-committed on the current uncertainties easing.

* Further, we believe the sector is fairly priced for a 4-6% earnings growth – as depicted in Exhibit 5, between 2015 and 2018, the sector went through a period of apathy where nothing major, good or bad, happened, and we see the sector underperforming the broader market if we witness a repeat of this phase.

* While the NSE IT now trades at only a 17% premium to the Nifty 50 (vs. a fiveyear average of 29%), it traded at an average discount of ~1% during 2015-18, as earnings growth remained depressed.

Scenario 2 (trade war escalates; US recessionary fears rise; client deferrals):

* In this scenario, the trade war escalates, US recessionary fears rise, and clients start deferring projects, leading to unanticipated revenue loss.

* The lower end of Infosys/HCLT guidance does bake this in. Considering most large caps within our coverage universe are now expected to grow between 0% and 4%, this scenario could see earnings estimates dip further.

* In such a scenario, a further correction over the next 2-3 quarters cannot be ruled out.

Scenario 3 (genAI implementation-led revenue push and major earnings upgrades):

* Scenarios 1 and 2 do not offer meaningful upside: scenario 1 could see some consolidation at current levels, whereas scenario 2 could see some correction. We look at what needs to happen for the sector to receive a major earnings push.

* A massive economic shock has in the past catapulted growth in the sector (view our report dated 4th Apr’25: Liberation Day and Indian IT: Breaking point or turning point?)

* However, we do acknowledge that such a revenue push seems a bit far-fetched for the sector at the current stage, and a sector-wide earnings upgrade cycle is not the most likely outcome as things stand.

How to play the sector: Positioning over predictability

* We prioritize correct positioning over predictability, favoring bottom-up transformation and margin-driven stories over top-down discretionary names.

* Among Tier-I players, we prefer TECHM, driven by early signs of transformation under new leadership and improving execution in BFSI. Margin expectations are now more reasonable, and niche offerings are resonating well. We believe TechM’s transformation remains relatively decoupled from discretionary spending. With further scope for telecom recovery and operational efficiency, we see room for sustained margin improvement going forward. We continue to like HCLT for its all-weather portfolio and believe TCS offers a decent riskreward balance.

* The previous downcycle showed that mid-tier firms can thrive in cost-focused environments. Coforge’s recent deal with Sabre is a strong indicator that midtiers now have both the scale and the solution maturity to win cost-saving deals. Our bet is on mid-tier companies with strength in BPO, data, RPA, and GenAI acceleration—with Coforge and Persistent emerging as early winners.

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