Indian IT To Witness Slowdown For Third Straight Year, Says Citi: Infosys, HCL Tech Among Top Picks

Citi Research remains cautious on the Indian IT space, and highlighted that the sector will witness a slowdown for the third straight year in FY26, as both growth and margin outlook are tough and unlikely to change in the near term.

The brokerage's top picks are Infosys Ltd., and HCL Technologies Ltd., over other large names. Citi prefers Hexaware Technologies Ltd., and Mphasis Ltd., over other mid-sized players. The brokerage noted that "FY26E is the third slow growth year for our Indian IT coverage".

"While a tough macro impacts decision making, we believe the slowdown is due to a combination of factors and not only macro," it added. Citi believes that continued spend prioritisation towards AI; productivity - AI and industry competitiveness driven; lack of meaningful ramp up in new AI work; GCC growth, are a combination of factors resulting in slowdown.

The brokerage noted that improved growth visibility will be the catalyst for stock performance and that is lacking even post the approximately 24% underperformance of NSEIT to NIFTY CYTD. "The past few years have seen consistent downgrades in growth estimates across most of the sector. Given these factors, it is difficult to predict a growth recovery," it added.

"Margins are starting to see pressure given: third year of slow growth; heightened competitive intensity and asks for AI driven productivity; need for investments. Visa risks need to be monitored," said analysts.

As per the Citi note, client spend prioritisation towards AI, not helping IT services as much for now. It added that, the tough macro does impact decision-making on certain deals and impacts growth. For the past several years, Indian IT revenue growth has moved directionally in line with the S&P500 revenue growth, driving the common view.

However, directional correlation seems to be a bit weaker this time – likely because of S&P 500 operating performance continues to be challenged, diversion of IT spend towards AI initiatives and productivity pressure driven by industry fragmentation as well as AI.