Navigating A Sector Slowdown: TCS, Infosys BNP Paribas' Top Buys On Eve Of IT Earnings
The Indian IT Services sector's dividend yield is at its highest in the last decade and this makes some stocks attractive.
Indian IT services sector is currently facing headwinds as investors anticipate a potential United States recession. Nifty IT index has plunged over 20% on a year-to-date basis, reflecting these concerns.
With TCS hours away from kicking off the earnings season for the sector, BNP Paribas notes that according to trends in the past, a slowdown in the US real GDP growth rate impacts Indian IT revenue growth.
This would imply that in financial year 2026, the domestic IT sector's revenue growth will likely be flat, according to the brokerage. It also noted that since 1992, the Indian IT services industry's revenue growth has consistently remained above the US real GDP growth and has never experienced a year-over-year decline.
Despite the anticipated slowdown, the sector still offers pockets of opportunity, according to analysts at BNP Paribas. The Indian IT services sector's dividend yield is at its highest in the last decade and this makes some stocks attractive.
Top Picks: TCS And Infosys
The brokerage has considered the worst-case earnings scenario and applied mid-cycle price-to-earnings multiples. BNP Paribas estimates that the recent corrections in Tata Consultancy Services Ltd., Infosys Ltd. and LTIMindtree Ltd. have largely factored in the potential downside risks from earnings cuts and valuation de-rating.
The brokerage listed TCS and Infosys as its top picks within its coverage, as they are now trading at dividend yields close to their five-year peaks.
On the other hand, the brokerage flags the most downside risks in Tech Mahindra Ltd. and Wipro Ltd.
The earnings estimates for the fiscal year 2026-27 have been lowered by 4–11% and target prices by 4-18%. This is to accommodate a weak near-term demand environment and a gradual recovery expected in fiscal year 2027.
The stock picks are based on factors such as exposure to the most impacted verticals, earnings risks, valuation, and dividend yield support.
Outlook On The Indian IT Sector
BNP Paribas's overall outlook for the Indian IT services sector in the near term is cautious due to the expected economic slowdown in the US.
Despite this, the attractive dividend yields of some major players provide a backstop to further significant price declines. The brokerage also highlights a key upside risk to the estimates, particularly for growth stocks like Persistent Systems Ltd. and Infosys. This is any reversal or delay in the tariffs while a prolonged impact of tariffs represents a significant downside risk.
