IDBI Capital has maintained a positive medium-to-long-term outlook for the IT sector despite expectations of near-term softness in Q3 performance. The brokerage firm's stance comes as major IT companies including TCS, Infosys, and Tech Mahindra prepare for what appears to be a challenging quarter.

Sector Outlook and Key Drivers

Despite the anticipated Q3 softness, IDBI Capital remains bullish on the sector's prospects, particularly for mid-tier IT companies. The firm has identified several key factors that support their positive outlook for the medium to long term.

AI Initiatives and Deal Pipeline Strength

The brokerage firm has highlighted two primary drivers for their optimistic stance on the IT sector. Enterprise-wide scaling of AI initiatives represents a significant growth opportunity, as companies across various industries continue to invest in artificial intelligence capabilities. Additionally, robust deal pipelines suggest sustained business momentum despite near-term challenges.

Market Positioning

While major IT players face immediate headwinds, the sector's fundamental strength appears to remain intact. The combination of technological advancement through AI adoption and strong business development activities provides a foundation for future growth beyond the current quarter's expected softness.

Leading brokerages have issued contrasting yet complementary views on India's IT sector, with both CLSA and Jefferies highlighting concerns about largecap players while identifying opportunities in the midcap segment. The assessments come amid persistent weakness in discretionary spending and growing concerns about earnings sustainability.

CLSA's Cautious Stance on Large IT Players

CLSA's senior research analyst Sumeet Jain has provided detailed explanations for the firm's recent downgrades of major IT stocks, citing sustained weakness in discretionary spending and seasonal headwinds. Speaking to NDTV Profit, Jain noted that "clearly the broader discretionary demand has not revived in the markets, and other than the BFSI vertical, we are not actually seeing any strength in the other verticals, particularly for the large-cap players."

The brokerage's specific actions reflect concerns about valuations and execution capabilities:

Jefferies Warns of FY27 Earnings Risks

Jefferies has raised additional concerns about the sector's medium-term prospects, warning that Indian IT stocks face earnings downgrade risks in FY27. The brokerage expects this risk to weigh on price-to-earnings multiples across the sector. Despite improving US economic growth outlook, Jefferies noted that recent geopolitical developments could dampen discretionary spending sentiment.

The brokerage's recent rating actions include:

Growth Outlook and Challenges

Jefferies expects sector growth to improve slightly to 4.70% in FY26, though this remains below consensus expectations of 5.80% for FY27. The brokerage highlighted several headwinds including AI's continued impact on growth as clients demand productivity benefits, and rising hardware spend share in IT budgets potentially dragging services spend.

Midcap IT Stocks Emerge as Preferred Picks

Both brokerages show strong preference for midcap IT companies, citing their optimal positioning for current market dynamics. CLSA sees significant upside potential in select midcap players:

Jefferies has highlighted Infosys and HCLTech among largecap picks, while identifying Coforge, Sagility, IKS and Mphasis as top midcap selections. These midcap companies are expected to deliver EPS growth at 14-27% CAGR between FY26-28.

Market Response and Current Trading

Most Nifty IT index stocks are currently trading with gains, led by Persistent Systems and Mphasis up 1.00% each, while Coforge, TCS and Wipro show gains between 0.50% to 1.00%. The mixed brokerage views reflect the sector's complex dynamics, with analysts recommending tactical position adjustments rather than complete sector avoidance.