The sharp correction comes amid mounting macroeconomic headwinds, softer client spending, and increasing pricing pressure, all casting a long shadow over revenue growth for FY26.
The recent market correction has pushed IT sector valuations down from their peak levels. The sector now trades at 21.7 times forward earnings, roughly 14% below its five-year average. According to the HDFC Securities report, this valuation reset has made tier-1 IT companies more attractive, leading analysts to upgrade Infosys and HCL Technologies to a ‘BUY’ rating.
HDFC Securities points to multiple headwinds dragging down the sector’s performance. The brokerage firm has cut its FY26 and FY27 revenue estimates by approximately 1%, citing a softer-than-expected first half of the fiscal year. While some deal activity has started to pick up, clients remain cautious amid global macroeconomic uncertainty and geopolitical tensions, especially in the U.S., where tariff-related fears and a recent H1B visa fee hike have made offshore outsourcing more complex and potentially more expensive.
Despite this challenging backdrop, some green shoots are emerging — particularly in AI and cost optimisation deals. Generative AI (GenAI), once feared to be deflationary, is now driving full-scale projects across sectors. This trend has already been reflected in Accenture’s recent commentary, and Indian IT majors are expected to benefit from similar initiatives, which are slowly moving beyond pilot stages.
Muted Growth Expected in Q2FY26
Despite being a traditionally strong seasonal quarter, Q2FY26 is expected to show muted sequential growth across the Indian IT sector. Among tier-1 players, Infosys and LTIMindtree are forecasted to lead with +1.8% quarter-on-quarter growth in constant currency terms, while others like TCS, HCL Tech, Wipro, and Tech Mahindra are likely to post flat sequential performance.
In the mid-tier segment, Persistent Systems, Mphasis, and L&T Technology Services are projected to report relatively strong growth. In contrast, Birlasoft, Tata Elxsi, and Cyient may underperform due to weak client demand and slower ramp-ups in specific verticals.
FY26 Outlook: Cautious Optimism with Stable Guidance
Looking ahead, the outlook for the remainder of FY26 remains cautiously optimistic. Most IT companies are expected to maintain their revenue and margin guidance despite persistent macroeconomic pressures. Infosys is likely to retain its 1–3% revenue growth forecast, while HCL Tech is expected to stick to its 3–5% growth guidance.
Although the sector continues to face pricing pressures and challenges from evolving delivery models, factors such as rupee depreciation and subdued hiring may help stabilise operating margins in the near term.
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Valuations Adjust, Upgrades for Tier-1 Players
The broader market correction has brought IT sector valuations off their recent highs. Currently, the sector is trading at 21.7x forward earnings, which is about 14% below its five-year average. This adjustment has made tier-1 IT companies appear reasonably valued, prompting HDFC Securities to upgrade Infosys and HCL Technologies to a “BUY” rating, setting a target price of Rs 1,800 for Infosys and Rs 1,740 for HCL Tech.
However, mid-tier IT companies remain relatively expensive, despite recent underperformance, which may limit near-term upside in that segment.
What Lies Ahead: A Selective Recovery
While short-term risks persist — including U.S. policy uncertainty, rising visa costs, and continued caution in client spending — the Indian IT sector may be positioning for a stronger finish to FY26. Analysts expect AI-led transformation, cost optimisation, and digital modernisation initiatives to drive recovery in deal activity.
Given the uneven recovery, analysts recommend a selective investment strategy, focusing on companies with strong deal pipelines, stable margins, and resilience in operations.
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