Near term revenue growth of Indian IT companies will remain under pressure

HDFC Securities Institutional Equities’ Research Analyst (Strategy), Aryan Singh Dalal, shares his views on the IT sector.

 Revenue of Indian IT companies in constant currency terms seems to be weaker in the June quarter. What do you think will be the scenario in this regard in the near term?

The revenue for Tier 1 IT companies in Q1FY26 declined -1% QoQ CC as compared to +0.8% QoQ CC growth in Q4FY25, however the deterioration is lower as compared to -1.6% QoQ CC in FY24. The near-term revenue growth will remain under pressure due to lower discretionary spending and current macro uncertainties. However, we believe that the growth will improve gradually in H2 supported by healthy deal wins (cost takeout & vendor consolidation) and clients willingness to spend into innovative technologies like GenAI.

 The risk of stagflation is high in the US economy. What will be its impact on Indian IT companies?

Due to stagflation, the US clients will incur higher cost while business or demand falls which will lead to lower discretionary spending on IT projects, slower deal cycles, deal in projects and weaker revenue growth.

 How well are Indian IT companies poised to take advantage of services related to Artificial Intelligence?

Major IT giants (Tier 1 companies) have already shifted their business model from general digital transformation to AI/ML related services and have started upskilling their talents in new services like AI/ML to become future ready. TCS has trained over 1,14,000 employees (~19% of the total headcount) in advanced AI/ML/GenAI service and Infosys has over 2,70,000+ employees AI aware (83% of the total headcount).

 IT stocks are currently having an average Price-to- Earnings (P/E) ratio of around 27.69. Do you think this ratio is justified, given their growth prospects in the near term?

The IT index currently trading 23.3x which is at -9% discount to its 5-year average (26x) while its trading at +10% premium to its 10-year average (21x).

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Source : HDFC Securities Institutional Equities