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.

Foreign portfolio investors (FPIs) sold a record $8.5 billion worth of Indian information technology stocks in 2025, marking the highest annual sell-off on record for the sector. This massive divestment highlights a sharp divergence between IT shares and the broader market, with foreign investors cutting exposure to technology even as benchmark indices posted gains.

Market Performance Divergence

The scale of selling created a stark contrast in performance metrics between the IT sector and broader market indices during 2025:

This IT sector selloff formed part of a broader $18.8 billion equity outflow by FPIs across all sectors in 2025, representing the highest annual outflow since NSDL and CDSL began compiling data in 2012.

Q3 FY26 Growth Outlook

Analyst expectations for the upcoming quarter remain cautious. Yes Securities anticipates that seasonal factors such as furloughs, combined with prevailing macro headwinds, are likely to keep sequential revenue growth muted for most IT players in Q3 FY26. However, the brokerage notes resilience in core segments despite the challenging environment.

Major IT Stock Declines

Losses in the IT index were led by significant declines across major technology companies:

H-1B Visa Concerns Drive Selloff

IT shares faced pressure from multiple factors, including concerns over a weaker earnings outlook and slower momentum in new deal wins. The sector experienced intensified pressure after the US administration under Trump adopted a tougher stance on H-1B visas, introducing a $100,000 fee on new visas. This development raised concerns given the sector's heavy reliance on overseas skilled workers.

The H-1B visa issue particularly impacted Indian IT companies, as firms such as TCS have been among the largest beneficiaries of these visas in recent years. The new restrictions raised worries over higher operational costs and workforce planning challenges.

Monthly FPI Activity in IT Stocks

FPIs demonstrated selective buying patterns throughout 2025, with net purchases occurring in only three months:

All other months recorded net selling activity in IT stocks.

Sector-wise FPI Flows

Beyond IT stocks, FPIs recorded significant outflows across multiple sectors during 2025:

However, some sectors attracted positive flows, with telecommunication shares leading inflows at $5.40 billion during the year. Miscellaneous stocks recorded $2.40 billion in net inflows, followed by oil and gas stocks at $939.00 million and service sector shares at $856.00 million.