IT Sector Faces Challenges, But Kotak Sees Opportunities
Kotak Institutional Equities has named Tata Consultancy Services, Infosys, Tech Mahindra, and Coforge as favored stocks in India's IT services sector. However, the firm's latest report offers a realistic view of the industry, tempering optimism. The March 2026 quarter is expected to show slow sequential revenue growth across the board. This is due to varied demand from different industries and regions, plus the significant impact of generative AI. While currency gains might boost year-on-year results, underlying growth is still slow. The sector's revenue growth is predicted to be around 4-5% in fiscal year 2027, a notable drop from past years of double-digit growth.
Kotak's Top Picks: TCS, Infosys, Tech Mahindra, Coforge
Tata Consultancy Services (TCS) is expected to post modest growth of around 1.2% in constant currency for the March 2026 quarter, with contributions from the Coastal Cloud acquisition adding to organic performance. International markets are projected to lead, while domestic business may slightly contract. Margins are expected to remain stable, with benefits from depreciation balancing wage increases and acquisition expenses. The firm secured an estimated $9 billion to $10 billion in deal wins. This figure is lower year-on-year due to a high prior-year base and no large mega-deals, which could affect near-term momentum. Trading at a P/E ratio of around 17-18.5 and a market cap near ₹8.87 trillion in early April 2026, TCS faces scrutiny over its valuation given these growth limits.
Infosys projects a sequential revenue drop of around 1% for the March 2026 quarter, blamed on seasonal slowdowns and fewer working days. Stable margins are forecast, with currency gains helping to offset higher visa costs. Large deal wins are estimated between $2.5 billion and $2.75 billion, similar to the previous year. For fiscal year 2027, Infosys is expected to forecast 3% to 5% revenue growth, factoring in the Versent acquisition. The company's focus on AI, cloud, and digital services is key as it faces a projected 0-3% growth guidance for FY26, even after achieving record free cash flow in FY25. Its market capitalization stood around ₹5.27 trillion with a P/E ratio in the 18-19 range in early April 2026.
Tech Mahindra anticipates flat revenue for the March 2026 quarter as the sector returns to normal. Margins, however, are expected to improve by about 60 basis points, helped by better operations and currency gains. Deal wins are estimated at $1.1 billion, showing strong year-on-year growth, though currency losses could impact net profit. Trading at a P/E ratio of 25-31 and a market cap of about ₹1.37 trillion in April 2026, investors are watching whether the company prioritizes reinvesting for growth or expanding margins.
Coforge is expected to perform relatively stronger, with projected sequential growth of 2.2% and year-on-year growth near 19.7% in constant currency for the March 2026 quarter. Margins are expected to grow, thanks to a better mix of services and operating efficiency. Strong deal activity is expected, with wins estimated between $550 million and $600 million, including several large contracts. Analysts have praised Coforge as a top mid-cap IT stock.
AI's Double-Edged Impact on IT Services
Generative AI poses both opportunities and challenges for India's IT sector. It promises to create new, higher-value services with potentially higher billing rates (up to 30-40% more for certain skills), but it also puts downward pressure on traditional revenue. Estimates suggest AI could cut vendor revenue by 3-4% annually from 2025 to 2027. AI deployment is already showing productivity gains, with efficiency improvements reaching up to 30-35% in some cases. However, automation means less need for billable hours in areas like application support and testing, which could affect earnings and growth. The Nifty IT index has underperformed, falling 20.7% year-to-date in 2026. This reflects market concerns about these fundamental industry shifts.
Valuation Worries and Sector Bifurcation
Some analysts are cautious about whether current stock valuations can be sustained, given how AI could affect revenue. Concerns include AI automation potentially reducing revenue from application services, a major income source for many IT firms. While some argue this impact is overstated and IT firms will be key integrators of AI, others warn AI could permanently lower long-term growth and returns.
Competitors like HCL Technologies, trading at a higher P/E of 22x (market cap ₹3.68 trillion in March 2026), are seen as better at using AI for growth than Wipro, which trades at a P/E of 15x (market cap ₹1.965 trillion). This difference suggests a possible split in the sector: companies with strong AI strategies and execution may keep higher valuations, while others could see their valuations decrease.
Outlook: A Slower, Selective Growth Era
Looking forward, analysts expect a slow recovery in the Indian IT sector by fiscal year 2027. Nomura forecasts revenue growth for large companies to speed up from about 1.8% in FY25 to 4.5% by FY27. However, the sector is no longer seen as a guaranteed double-digit growth engine, requiring careful management and stock picking. Key factors expected to drive this recovery include the continued earning from AI services, easing economic pressures, and growing client confidence in IT spending. How well TCS, Infosys, Tech Mahindra, and Coforge integrate AI into their operations and turn efficiency gains into new revenue will be key to their future success.