Tata Consultancy Services (TCS) continues to shine as Macquarie’s leading choice within the technology sector, despite the overall challenges faced by the Nifty IT index this year. While the index has shown a slight uptick of over 1% year-to-date, it remains significantly down by more than 26% since its peak in December 2024. This underperformance raises questions about the future trajectory of India’s IT sector, prompting insights from Ravi Menon, an IT Services Analyst at Macquarie Capital.
A Challenging Yet Promising Outlook for IT
Menon acknowledges that the landscape for India’s tech industry is fraught with challenges, but he believes it’s not as dire as some might think. Although results from Infosys Ltd. have disappointed investors, Menon characterizes the current environment as “moderately encouraging.” He points out that there are no indications pointing to a severe downturn similar to what was experienced during the COVID-19 pandemic.
- Client Spending: Menon expects clients, particularly in the U.S., to postpone spending decisions instead of implementing drastic cuts. This cautious approach is likely to influence performance in the first quarter of the financial year 2026, which may show flat or slightly negative results without a steep decline.
TCS: A Beacon of Stability
Among the giants, Tata Consultancy Services stands out as Macquarie’s preferred pick. Menon anticipates notable surprises in both revenue and profit margins from TCS in the first half of this fiscal year. He highlights a surprising rise in employee costs, possibly linked to a slowdown in hiring, which could provide future margin advantages. TCS’s strong execution and extensive scale position it favorably for continued success.
Mid-Cap Opportunities
In the mid-cap segment, Menon expresses optimism regarding L&T Technology Services. With limited exposure to the German automotive sector and increasing interest in brownfield expansions, the company recently received a “double upgrade” as valuation concerns eased.
Other mid-cap contenders like LTI Mindtree, Persistent Systems, and Coforge are also gaining traction, demonstrating consistent revenue generation. These firms are no longer confined to small contracts and could deliver unexpected results in the near future.
Caution for Others
Despite the positive outlook for some, caution remains the prevailing sentiment for companies like Wipro and Infosys. Menon points out that Infosys’ guidance reflects lower anticipated pass-through revenues, a realistic expectation given the current market conditions. He believes that cost-cutting initiatives, which have been postponed for the past two years, are set to commence this year, potentially evolving into larger transformation projects.
Looking Ahead
The impact of U.S. interest rate hikes since January 2022 has constrained IT budgets. However, as macroeconomic stability improves, delayed projects may finally come to fruition. HCLTech, which narrowly missed its fiscal 2024 guidance, could find itself in a strong position if it surpasses its 3–5% growth forecast for fiscal 2025. Market sentiment will largely depend on how well companies manage to meet or exceed their performance guidance.
While a global recession poses risks, Menon does not see it as a likely scenario. Instead, he views the current climate as a genuine test for digital-native initiatives that emerged post-COVID, with monetization opportunities expected to materialize in fiscal 2026.
For further insights on the tech industry, you can explore our articles on HCLTech’s latest strategies and the evolving landscape of tech investments.
