Performance of IT sector stocks likely to remain subdued over next few quarters but are analysts recommending a buy?
Indian IT stocks have faced turbulence in recent months amid concerns over a potential US economy slowdown. Given the moderate correlation between US economic performance and revenue growth in India’s IT services sector, any weakness in the US economy is likely to hit Indian IT services’ demand.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
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A BNP Paribas report analyses the last four downcycles in the US and its impact on Indian IT services export revenue growth. It says that a 1.5 percentage point dip in the US real GDP growth could hit Indian IT services revenue growth by 5.1 percentage points.
Around 80% of the revenue (in USD terms) of the Indian IT sector is likely to come from exports for 2024-25. With the US being the largest revenue market for most Indian IT companies, the worries regarding an economic growth slowdown in the US have significantly impacted the sector’s sentiments.
The benchmark Nifty IT index has lost over 17% year-to-date and significantly underperformed the Nifty 50 index, which delivered 2.5% returns. Despite a recovery since the second week of April 2025, the IT sector benchmark turned out to be the worst performing sector index among the 15 sectoral indices of the NSE. The analysis is based on closing values between 1 January 2025 and 29 April 2025.
While IT company commentaries for the December 2024 quarter pointed to a gradual recovery in discretionary client spending, fresh US trade tariffs and potential retaliatory measures are likely to weigh on sentiment. Expectation of higher inflation and the prospect of delayed interest rate cuts could further strain US enterprises.
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Analysts anticipate that US companies may be compelled to reassess their budgets, delaying the rollout of discretionary projects— an adverse development for Indian IT firms. The implementation of tariffs is expected to impact all major business verticals, including consumer packaged goods, retail, manufacturing, logistics, and life sciences and healthcare.
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Medium-term outlook
The performance of the IT sector is expected to remain subdued over the next few quarters and analysts expect weaker revenue and earnings growth for 2025-26. Sonam Srivastava, Founder and Fund Manager, Wright Research PMS, says that the sector is expected to remain in a consolidation phase over the next one-two quarters, with revenue growth likely to stay soft, but stable.Also, the currency movements are expected to impact the margins of IT companies. “The Dollar Index fell 4% in April 2025, while the rupee strengthened on the back of FPI inflows and lower oil prices. While this is good news for India’s import bill, it could squeeze margins for IT exporters who earn in US dollars,” says Animesh Hardia, Senior Vice President, Quantitative Research, at 1 Finance. A gradual recovery is expected in the second half of the current financial year, which will be contingent on the pick-up in discretionary IT spending and stabilisation in the global economic environment. Analysts list cloud migration, AI (artificial intelligence) adoption, cybersecurity, and digital transformation initiatives as longterm growth drivers of the IT sector.
How to approach IT stocks
Analysts suggest investors should look for companies with diversified revenue streams and strong fundamentals. Investors should consider firms with healthy return ratios and cash flows, stable management, a good execution track record, stable client mining, and leadership in AI transformation.Also, investors who want to enter the IT space should adopt a staggered approach. “Tactical positioning through phased investments over the next few quarters could offer better risk-adjusted returns, particularly as signs of a turnaround become clearer by late 2025-26,” adds Srivastava.
Sector valuations have moderated following a sharp price correction in recent months, bringing down the price-to-earnings (PE) ratio. According to NSE data, the Nifty IT index is currently trading at 26.6 times its earnings, below its five-year average of 28.7 times. Additionally, the sector is offering its highest dividend yield in a decade, excluding the Covid period, as per a BNP Paribas report.
Q4 earnings
The concerns were evident in the March quarter results, with six of the eight Nifty IT index stocks missing consensus revenue estimates in rupee terms, as per the Reuters-Refinitiv data. However, improved operational efficiencies supported profitability, with five out of eight companies exceeding net profit expectations. Here’s how the three largest IT companies in the Nifty IT index fared in the March 2025 quarter.TCS
The revenue declined by 0.8% on a quarter-over-quarter basis in constant currency terms.The ramp-down of the BSNL deal weighed on the India business, which declined 15% quarter-over-quarter. On the other hand, the US business reported flat growth, and Europe registered a 2% growth.An encouraging total contract value of $12.2 billion was reported, marking a 20% quarter-over-quarter growth.The management maintains a positive outlook for 2025-26 and expects better performance than 2024-25, especially in international markets.It is also exploring domestic opportunities to offset the impact of the BSNL ramp-down.Motilal Oswal report states that TCS is well-positioned to grow over the medium term, aided by its order book, exposure to long-duration orders and ability to sustain its industry-leading margins and superior return ratios.Infosys
The revenue declined by 3.5% on a quarter-over-quarter basis in constant currency terms.Higher than expected decline in the third-party revenue and lower volumes impacted revenue growth.The total contract value was $11.6 billion in 2024-25, down 34% yearon-year.The earnings before interest and tax (EBIT) margins were strong, supported by ‘Project Maximus’— an initiative aimed at optimising costs and enhancing profitability.The management has provided a weak revenue guidance of 0-3% for 2025-26 amid increased uncertainty due to global tariff wars.The company is aiming for strategic acquisitions.A Nirmal Bang report states that sustained large deal wins, AI-first transformation tailwinds, and disciplined capital allocation enhance long-term visibility.HCL Technologies
The revenue declined by 0.8% on a quarter-over-quarter basis in constant currency terms.The new deal total contract value (TCV) surged 43% quarter-overquarter in the March quarter.For 2024-25, the TCV moderated to $9.2 billion compared to $9.7 billion in 2023-24.The management provided an encouraging revenue guidance of 2-5% for 2025-26.BNP Paribas report states that the company offers an attractive dividend yield and a healthy growth outlook in an uncertain environment. #sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}This story originally appeared on: India Times - Author:Faqs of Insurances
