Indian IT May Underperform In FY27, Warns Analyst | Tough Road Ahead For IT Stocks?

[00:00:00]Kunal Bajaj, Equity Research Analyst at Choice Institutional Equities joins in.

[00:00:03]Kunal, good afternoon and welcome to the show. This is Hiral on this side. You know, my question to you over here is, I mean, yes, a lot of analysts were seeing some green shoots, and it was a very divided view when you talk about Indian IT as a basket right now. There was no consensus view that anyone was able to pick up.

[00:00:22]And with what Accenture has done as well, clearly it is telling you that, okay, probably this year is not going to be for Indian IT. Is that your view as well, taking the guidance cut and the commentary into consideration?

[00:00:36]>> Sure. Thanks for having me on the show.

[00:00:40]What we see that we at the start of FY '27, we were expecting some green shoots, and we were seeing that some client commentary is also turning positive. But what we see now that with the guidance given by HCL Tech Infosys, that was also not that promising. Now with Accenture also cutting the upper end of the guidance, we believe that the view which we have is cautiously neutral on the Indian IT space at the moment. We see that the deal deal bookings have been very weak. There has been prolonged deal conversion delays, and as well as continued weakness and softness in the discretionary spending. So we are expecting demand recovery likely to be gradual rather than very steep in FY '27. Thus we can see some underperformance from IT companies in FY '27 as well.

[00:01:30]>> Right.

[00:01:31]Kunal, good afternoon. This is Sharad here. Just wanted to understand if you had to compare the mid-cap and the large-cap ITs, which would be there you know, of preference right now because the mid-cap IT seems to be a little bit better placed than the large-cap ones.

[00:01:46]>> Yeah. Hi Sharad. So in my previous interviews as well, oh yeah, I have mentioned that we prefer the mid-cap spaces primarily because of couple of things. Firstly, we see that the business model of Tier 1 companies is mostly discretionary led as well as what we see that they have more exposure of legacy component works. On the other hand, mid caps are not that uh heavy in terms of legacy work. So, what we see that the deflationary impact due to the AI productivity is more specifically for for large cap companies rather than mid caps. So, we believe that mid caps are better off in this tech transition. And we have also mentioned in the past as well that in any other tech transition which has happened in the past, be cloud, let's say be the COVID disruption which had happened. In all of these scenarios, mid caps were the ones who were favored of and we we expect this to happen in this scenario as well. And what we see in the valuations point of view as well, valuations which mid caps used to trade at a premium, now that has also cooled off to a limit. So, we expect mid caps to be the flavor of the season going forward as well.

[00:02:48]>> Okay. So, mid cap IT to be the flavor of the season. But, Kunal, if you have to look at the valuation trough, I mean, hovering near historic trough levels in terms of IT as a sector, is there a void in terms of any triggers for even to see a little bit of an upside to come in and if so, if you see any triggers coming in, which would your preferred picks be at current levels?

[00:03:11]>> Sure. See, we don't see any immediate trigger at the moment because the all the eyes would be on the commentary from Q1 FY27.

[00:03:21]So, commentary would be a key trigger as to how Indian IT companies kind of give about the commentary about the demand outlook. But, we see that Accenture's demand outlook is also not that promising. So, we are expecting the similar case for Indian IT companies as well. And in the last demand commentary for Excel Tech and Infosys, they have also mentioned some uh some client concerns. So, we can expect that as well. So, in the immediate term, in the next next three or three or four months, we don't see any any trigger which can have a upside uh for the IT services companies. And also we we see that any uh upside which we see in in terms of uh rally might be sold off. So, we are not expecting any broad-based rally going forward. And in the mid-cap spaces, if you want to see in terms of valuations, we are expecting uh Coforge and Persistent to be the better off in both in terms of performance as well as valuations also have cooled off for them from the highest they have.

[00:04:16]>> Got it. Got it. That's interesting because any rally that you could see in terms of IT could be an opportunity to people for investors to book profits, and that's what it may look like as well. But thank you, Kunal, for joining in. Always a pleasure uh to get your views as well.