TCS Tops Macquarie's IT Picks Amid Soft Outlook And Deferred Spending
Although Infosys Ltd.’s results have disappointed, Menon describes the overall environment as “moderately encouraging,” with no signs of a deep downturn akin to the COVID-19 period.
The Nifty IT index has remained under pressure this year. While it is up over 1% year-to-date, it still lags significantly—down more than 26% from its December 2024 peak. According to Ravi Menon, IT Services Analyst at Macquarie Capital, the outlook for India’s IT sector is challenging but not as bleak as many believe.
Although Infosys Ltd.’s results have disappointed, Menon describes the overall environment as “moderately encouraging”, with no signs of a deep downturn akin to the COVID-19 period.
He expects clients—especially in the US—to defer spending decisions rather than make sharp cuts, as they wait for greater certainty. As a result, the first quarter of financial year 2026 may see flat or marginally negative performance, but not a dramatic decline.
Tata Consultancy Services Ltd. is Macquarie’s top pick in the sector. Menon expects both revenue and margin surprises from the IT major in the first half of this fiscal, noting a surprising spike in employee costs that could be linked to a sharp slowdown in hiring, offering future margin leverage. TCS is also expected to benefit from steady execution and its scale.
In the mid-cap space, Menon is optimistic about L&T Technology Services Ltd. With minimal exposure to German auto clients and rising interest in brownfield expansion, the company saw a “double upgrade” as valuation concerns eased.
He also sees promise in mid-cap challengers like LTI Mindtree Ltd., Persistent Systems Ltd., and Coforge Ltd., which are showing consistent revenue performance. These companies are no longer limited to small contracts and could surprise in the upcoming quarters.
Caution remains the dominant theme, particularly for Wipro and Infosys. Menon notes that Infosys' guidance assumes lower pass-through revenues, which he believes is realistic in the current environment.
Cost-takeout projects, deferred over the past two years, are expected to begin this year, possibly evolving into larger transformation programmes. US interest rate hikes since January 2022 had curbed IT budgets, but with macro stability improving, some of these delayed programmes may see the light of day.
HCLTech Ltd., which narrowly missed financial year 2024 guidance, could be in a strong position if it beats its 3–5% fiscal 2025 growth forecast. Market sentiment will hinge on how well companies meet or exceed guidance.
While recession remains a global risk, Menon doesn’t view it as the base case. He believes the current environment presents a real test for digital-native programmes launched post-Covid, with monetisation potential expected to unfold in fiscal 2026.
