The rupee’s steep depreciation against the dollar, euro and pound is set to deliver cross-currency tailwinds of up to 65 basis points for IT firms in the fourth quarter, according to Jefferies, with Tech Mahindra, Tata Consultancy Services and Infosys among the biggest beneficiaries at 66 bps, 61 bps and 53 bps, respectively.
“The recent sharp depreciation in the rupee offers a cushion to consensus’ earnings estimates for CY26/FY27 and helps offset some pressures emanating from elevated macro and geopolitical volatility, uncertainties around AI evolution and adoption, changing pricing constructs, and potential deflationary impact on IT budgets,” Emkay Global said in a note.
With a 9.9% slide in FY26, rupee has turned out to be the worst performing currency in the Asian market amid heavy FII outflow, soaring crude oil prices and a global scramble for dollar-based assets.
The currency boost comes as the sector faces a perfect storm of challenges. The Nifty IT Index has underperformed the broader market by roughly 10% over the past three months, while stocks have cratered 22% year-to-date versus the Nifty, hammered by mounting fears over generative AI’s structural threat and fresh uncertainty from the Middle East crisis.
“INR depreciation is the only relief for Indian IT—it is likely to support margins in the near term,” JM Financial said, adding that the sector’s sharp underperformance in February and March followed a brief January rally as “concerns around the potential impact of Generative AI” intensified.
Jefferies expects aggregate margins for its IT coverage universe to remain flat quarter-on-quarter at 20.4%, “benefitting primarily due to forex tailwinds offset by slower sequential revenue growth.” Among large-caps, TCS and Tech Mahindra are forecast to post 60-75 bps margin expansion, while Coforge could lead mid-sized firms with a 145 bps improvement.”Due to the sharp INR depreciation, IT firms may recognize large hedge losses in Q4. We haven’t factored this in our estimates,” Jefferies cautioned.
Revenue growth, however, remains anemic. Analysts expect aggregate revenues to be flat quarter-on-quarter in constant currency terms, with TCS results on April 9 setting the tone for earnings season. Jefferies projects LTI Mindtree and TCS will outperform among large IT firms, while Infosys and HCL Tech are likely to report “muted revenue growth driven by usual seasonality.”
For fiscal 2027, Jefferies expects Infosys and HCL Tech to guide for 2-5% and 3-6% year-on-year constant currency growth respectively—cautious ranges reflecting a demand environment where “overall client budgets have not increased materially and discretionary spending remains at bay.”
Motilal Oswal struck a more somber tone: “After a whirlwind couple of months (NSEIT down 23% YTD), driven by narrative shocks, we expect 4QFY26E numbers to be somewhat uneventful.” The brokerage slashed target multiples by 30-40%, saying “the burden of proof now sits with IT services” to demonstrate they can survive and thrive amid AI disruption.
“While the fears around terminal value are difficult to validate or falsify,” Motilal Oswal added, “re-rating, thus, depends on proof of surviving and thriving.”
JM Financial remains cautious on valuations: “NSEIT is trading at 18x FY27 consensus EPS; sector rerating is unlikely to happen if concerns over the impact of Gen AI continue. We remain selective and prefer stocks underpinned by reasonable operational” visibility, favoring Infosys among large-caps.
Emkay Global noted the sector’s recent bounce: “The underperformance has partially reversed over the past 1M, with the index outperforming the broader market by ~6% on sharp rupee depreciation, which has improved earnings defensibility.”
Still, structural headwinds loom large. “We worry about (a) increased competition given tough demand environment (b) higher productivity ask in existing work due to Gen AI (c) Insourcing—GCCs are doing relatively better than IT services,” JM Financial said.
For now, the weakening rupee offers a reprieve but with AI uncertainty hanging over the sector’s long-term outlook, investors will be watching FY7 guidance and management commentary closely when results begin rolling in next week.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)