Will Buying the Dip Work for IT Stocks?

Historically, Indian IT stocks have delivered strong returns when bought during periods of extreme pessimism

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Companies that outperformed their larger peers in recent times are beginning to see signs of strain, with revenue growth slowing in Q1 FY26 compared to the past few quarters.

A lackluster demand environment and intense competition among companies to win contracts is also weighing on margins. Of the top five firms, only two saw a sequential increase in EBIT margins, while the rest suffered declines of 0.2% to 1.6%.

On a year-on-year basis, the three largest IT companies reported margin compression.

"The higher mix of cost take-outs in deals and intense competition, together with below-normal revenue growth over an extended period of time, is pressuring the margin profile of companies," Kotak Institutional Equities noted. "A few margin levers are exhausted—such as utilization and subcontractor usage."

Companies are leaning more on direct employee costs as a result, leading to lower variable payouts, wage hike deferrals, stricter performance management, and layoffs/restructuring, the brokerage further noted.

GenAI is also leading to uncomfortable questions around pricing, further clouding the outlook for IT firms. If fewer funds are needed on the job, clients are wondering why should they continue paying according to the legacy headcount-heavy model?

Infosys chief executive officer (CEO) Salil Parekh noted that while AI is leading to productivity benefits, a part of that is being shared with clients. The trend is noticeable even for mid-tier IT firms.

Venu Lambu, CEO and managing director of LTIMindtree, acknowledged that clients are having discussions on pricing at the time of contract renewals and even otherwise.

Darwin's Darlings