Kotak Institutional Equities expects a soft June quarter for the IT sector, citing AI-driven pricing pressure and tighter client budgets. The brokerage prefers TCS among large-caps, while highlighting Coforge, Hexaware, and Indegene as mid-cap picks due to strong deal momentum. Earnings estimates for FY2027-FY2029 have been trimmed by up to 1% to account for these industry headwinds.
What Happened
Kotak Institutional Equities has released a cautious outlook for the Indian IT sector, projecting a weaker-than-seasonal June quarter. The brokerage firm adjusted its revenue growth estimates for FY2027 through FY2029, cutting them by up to 1%. Additionally, fair values for several IT companies were reduced by as much as 21%. The report points to artificial intelligence as a primary factor, noting that AI-driven productivity gains are leading to deflationary pressures on pricing, while geopolitical conflicts and restricted client budgets continue to weigh on the industry.
Why The Sector Faces Pressure
IT companies are currently navigating a shift where clients are prioritizing cost optimization and AI-led efficiencies. This demand for efficiency often means that companies can deliver more work with fewer resources, which creates downward pressure on project pricing. While the depreciation of the Indian Rupee typically acts as a buffer for exporters, Kotak notes that the full benefit to earnings is often delayed because most large firms use extensive hedging strategies to manage currency risk.
Large-Cap And Mid-Cap Divergence
Kotak favors Tata Consultancy Services (TCS) within the large-cap space, noting that its current market valuation already accounts for much of the near-term weakness. Conversely, the brokerage remains more cautious on stocks like Infosys and Wipro, citing expected headwinds in the upcoming results. In the mid-cap segment, the focus has shifted toward companies with specialized capabilities and aggressive deal-winning streaks. Coforge, Hexaware, and Indegene are highlighted for their ability to maintain steady execution despite the broader sector slowdown.
The Role Of Acquisitions
Many firms are now using mergers and acquisitions to stay competitive. Companies such as LTIMindtree, Persistent Systems, and Coforge have been active in acquiring smaller firms to quickly build AI expertise and enter new client relationships. According to Kotak, the ability to integrate these acquisitions effectively and maintain disciplined capital spending will be a crucial factor in determining which companies outperform over the next few years.
What Investors Should Track
Investors may monitor the upcoming June quarter financial results for early signs of margin stability. Key monitorables include management commentary on pricing trends, the speed at which companies are winning new AI-related contracts, and whether client spending on digital transformation remains stable or continues to tighten. Additionally, the ability of mid-cap firms to execute on their existing deal pipelines will be important to watch as they attempt to gain market share from larger incumbents.