According to PL Capital, IT companies are expected to witness moderate improvement in Q2 FY27, as macro headwinds from the Middle East conflict continue to weigh on client spending and decision-making. The Fed's recent 25 bps rate hike, its first since July 2023, and the possibility of another hike later in CY26 are likely to keep IT spending decisions muted.
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The NIFTY IT Index has gained ~8% during July-September, recovering from the sharp correction in the previous quarter, but remains down ~28% in CY26.
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Despite the sharp decline, PL Capital remains constructively positive on the IT sector, although it expects performance to remain differentiated across segments.
The brokerage prefers select mid-cap IT and BPO companies, which are better positioned to navigate the current environment, supported by steady deal conversions and ramp-up of recent wins. In contrast, large-cap IT companies continue to face structural headwinds from AI-led deflation and leakage in traditional services, while the Middle East conflict and the Fed's rate hike are likely to further weigh on enterprise tech spending.
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ER&D companies are likely to remain under pressure, given continued weakness among European auto OEMs and subdued automotive technology spending.
While near-term growth remains modest, PL Capital prefer select mid-caps (Coforge, Mphasis and Persistent Systems) and BPO companies (FirstSource Solutions and Sagility) over large-cap IT and ER&D.
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