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NEAR-TERM CAUTION; LONG-TERM OPPORTUNITY

We expect IT companies globally to accelerate the integration of AI into their digital core to address technical debt & modernize legacy systems. This shift will likely drive increased client focus on cloud migration, data analytics, & AI-led services. We believe these areas will continue to drive near-term demand, led by vendor consolidation & technology transformation opportunities. Thus, the discretionary spending is also expected to remain subdued amid global macro uncertainty, further impacted by recent changes in US tariff policy. In such uncertain times, we also believe that IT companies might actively look for strategic & cost effective M&As (mainly from BPO space) to strengthen their respective AI capabilities for stronger long term growth.

During Q1FY26, average INR appreciated by 1.2% QoQ against USD to 85.6. Additionally, cross-currency movements—measured as a basket of major currencies against the USD—provided a significant tailwind, contributing an estimated 100–700 bps QoQ impact. Notably, EUR and GBP appreciated by as much as 7.1% and 5.7% QoQ, respectively. Meanwhile, Tier – I IT companies continued to announce notable deal wins throughout the quarter. Although macroeconomic challenges persist & continue to weigh on the Indian IT sector in near term, we believe that the favorable cross-currency environment, coupled with strong deal momentum among Tier-I players, will support resilient Q1FY26 top-line performance subject to TCV conversions & respective currency exposures.

EBIT margins are expected to vary across IT companies in Q1FY26, influenced by the timing of annual salary hikes for FY26. This would induce margin pressure for some companies this quarter, while others are likely to experience the impact in subsequent quarters. However, we believe that cross-currency tailwinds, along with ongoing cost-efficiency initiatives undertaken by many IT companies, will help mitigate potential margin erosion in Q1FY26. As a result, we expect bottom-line performance across the sector to remain largely resilient, despite persistent macroeconomic headwinds.

Cross currency movements to offset adverse constant currency impact

IT companies are likely to post muted CC growth of -2.0% to 4.0% QoQ, with Coforge leading the pack on account of ramp-up of large TCV booked in Q4FY25 which includes Sabre deal coupled with successful integration of recent acquisitions. Despite H1 typically being a strong period, FY26E may see a slowdown driven by macroeconomic concerns and the impact of U.S. tariff changes. Key verticals such as Manufacturing, Retail, Hi-Tech, and Communications are expected to face pressure, weighing on overall sector growth.

Margins likely to remain stable

We expect margins of our coverage IT companies to stay stable led by strong focus on productivity improvement through various cost optimization programs inducted by respective IT companies, plus deferred wage hikes in some cases coupled with currency benefit. However, mid-tier companies are expected to witness better margin expansion from -40 bps to 70 bps QoQ, driven by AI-led productivity improvements & strict cost control across operations.

Automotive weakness delays recovery for ER&D players

We anticipate a sequential decline across most ER&D companies due to continued challenges in the auto vertical, including slower ramp-up of existing deals. We expect QoQ growth of -3.9% to 1.0% in USD terms for Tata Elxsi, Cyient, KPIT, and LTTS. The auto sector faces headwinds from global demand slowdown, rising competition from low-cost Chinese EVs affecting R&D budgets of European OEMs, tariff uncertainties, and China's restrictions on rare earth metals. These curbs add medium-term risk, especially if they persist, further pressuring recovery & investment in automotive R&D initiatives.

Slight uptick in revenue guidance expected; Margins guidance to remain stable

We expect Infosys to increase lower end of FY26E revenue growth guidance to 1– 3% (earlier 0–3%), while HCLT is likely to maintain its 2–5% growth outlook. Wipro may guide for a sequential revenue range of -1% to +1% for Q2FY26E, and LTTS is expected to reaffirm its double-digit growth guidance for the fiscal. Margin guidance is anticipated to remain stable across companies, with most operating at peak utilization. Deal TCVs is expected to remain healthy, supported by continued traction in cost optimization and AI-led initiatives

High Conviction Investment Ideas

We believe, the ongoing investments and hyperscaler partnerships in the new-age technologies will differentiate IT companies going ahead. Thus, supported by strong AI playbooks & in-organic growth strategies of ZENT & COFORGE respectively, we remain optimistic on their long-term growth prospects.

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