Incremental gains, stable demand may boost IT stocks

Demand trends appear to be stable for the information technology (IT) sector, and headwinds may be easing. Most deals are still focussed on cost optimisation.Artificial intelligence (AI) adoption and penetration may be accelerating.

- DEVANGSHU DATTA

Analysts are increasing earnings estimates by modest amounts and pointing at a sector as a possible hedge against rupee depreciation.

Almost every listed IT company has seen quarter-on-quarter (Q-o-Q) growth in Q1FY26 over Q1FY26 with many beating consensus estimates for margins and growth. Financial services did well with the Big Five witnessing average growth of over 6.2 per cent. Several firms have hiked guidance, or lifted the upper end of the growth band.

Commentary is cautious, with Infosys and HCLTech guiding 2-3 per cent and 3-5 percent revenue growth for FY26, respectively. But this marks a change from several quarters of guidance downgrades from many firms and two-three years of slow demand. Mid-tier companies outperformed their larger peers on revenue growth, and margins were healthy across the sector. Valuations have declined to a point where free cash flows (FCFs) and dividend yield look good after deratings for the last two-three years. However, macro uncertainty remains and there’s no clear recovery in discretionary spending yet.