- The Indian IT sector expects muted growth in Q4 FY26E amid macro and geopolitical risks
- Rupee depreciation aids margins but AI-driven deflation triggers valuation correction
- AI adoption poses challenges but opens $300-400 billion deal opportunities for IT firms
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HDFC Securities Report
The Indian IT services sector braces for another muted quarter in Q4 FY26E, with tier-1 players growth projected at -1.1 to +0.9% QoQ CC and mid-tier companies ranging growth from -1.8% to +3.4%, as macro uncertainty, ongoing geopolitical tensions, and cautious client decision-making on large deals amid war escalation risks temper nearterm revenue traction.
The rupee depreciation brings some respite to margins, but AIled deflation concerns triggered the recent multiple de-rating.
Launch of new models from Gen-AI platforms like Claude and Palantir fuelled a ~24% correction over the past three months on fears of disrupting traditional SaaS/IT models.
Indian IT services companies note that deploying new Gen-AI models will prove difficult in complex regulatory brownfield environments. However, the expected ~6-7% deflation impact (up from 4%) will be offset by net-new AI-centric deals in a $300-400 billion opportunity pool, though this will temper the recovery pace.
The sector growth recovery is now hinging on pure execution capability as new deals are mostly outcome-driven, pricing is agent-augmented and renewals come at discounts.
Valuations have reset to pre-Covid levels and turned attractive post-correction.
HDFC Securities trims FY27/28E revenues/EPS by ~1%, hold multiples, and prefer Infosys and HCLTech among tier-1, and Mphasis and Birlasoft within the mid-tier segment.
Valuation and Outlook
HDFC Securities noted that the Nifty IT index has underperformed over the past three months, declining ~24%, weighed down by AI-induced disruptions narrative and protracted growth recovery.
At the current levels the Nifty IT Index is trading at a PE of 17.8x 1Y forward earnings, which is ~16% below its 10-year historical average (21.2x) and 4% higher than the pre-covid 10- year average (17.4x).
Within the sector, large‑cap IT companies are trading at 16.3 times and 14.7x FY27E and FY28E earnings, respectively, while mid‑caps trade at 19.4x and 16.5x.
The IT sector is projected to achieve a 5.9% USD revenue compound annual growth rate and an 10.8% EPS CAGR over FY26- 28E, improvement over the 2.8% revenue and 6.8% EPS growth seen in the past three years.
The current 1-year-forward sector valuation is in line with the pre-Covid 10-year average, indicating limited downside.
The rupee depreciation will provide cushion to margins. The brokerage reduces revenue and EPS estimates by ~0.4% and ~1% respectively and keep valuations multiples unchanged.
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