The Indian IT services sector is positioned for a growth recovery starting in 2026, following a phase of muted performance from 2022 to 2025. The upcoming revival is expected to be underpinned by AI services, which are emerging as the key growth engine, as reflected in the increasing traction of AI-led deal wins.
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HDFC Securities Institutional Equities
The Indian IT services sector is entering a new growth cycle powered by AI-led services, marking a strategic shift from traditional digital transformation to next-generation technologies.
After a muted phase between FY22–FY25, the sector is poised for a revival starting FY26, with growth acceleration expected from FY27 onward. HDFC Securities projects a USD revenue CAGR of 6% and EPS CAGR of 12% over FY25–28, supported by strong deal momentum and easing macro headwinds.
Outlook and valuations:
The IT index is down 12% YTD but has rebounded by ~9% over the past month, supported by easing macro concerns, rupee depreciation, stronger traction in AI-led deal activity, and rising expectations of discretionary spend recovery and growth normalization into FY27/28E.
The IT sector is projected to achieve a 6% USD revenue CAGR and an 12% EPS CAGR over FY25-28E, a marked improvement from the 3% revenue and 7% EPS growth seen in the past three years.
The current sector valuations stand 6% below the five-year average of 25.4x and are at 36% discount to the five-year peak of 32 times, reflecting an upside potential for rerating as AI-driven revenue streams expand and growth gains momentum.
The rupee depreciation will provide cushion to margins.
We turn positive on the sector and increase EPS estimates by ~3.5% and multiples by ~13%. Consequently, LTIMindree, Birlasoft, Sonata, and Happiest Minds are upgraded to Buy, with Mphasis upgraded to Add.
Top sector picks include Infosys, Tech Mahindra, and LTIMindree in the tier-1 segment, while Persistent, Mphasis, Birlasoft, and Sonata stand out among midtier IT companies.
Top Picks in Tier-1 IT:
Infosys (CMP Rs 1,616, TP Rs 2,060) – BUY
HCLTech (CMP Rs 1,683, TP Rs 2,000) – BUY
LTIMindtree (CMP Rs 6,292, TP Rs 7,500) – BUY
Mid-Tier Winners:
Persistent Systems (CMP Rs 6,521, TP Rs 7,400) – ADD
Mphasis (CMP Rs 2,954, TP Rs 3,460) – ADD
Birlasoft (CMP Rs 433, TP Rs 520) – BUY
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