Whalesbook
JM Financial has adopted a cautious stance on India's IT sector, citing concerns over slower revenue growth for fiscal year 2027. Worries about artificial intelligence (AI) deflation and a softer demand outlook are key factors. The firm now forecasts about 3% revenue growth for the top 10 Indian IT companies in FY27, down from an earlier estimate of 4%. A sector-wide re-rating is unlikely until AI deflationary pressures ease and FY27 growth becomes clearer. The Nifty IT index has already lagged the Nifty 50 by approximately 13% year-to-date in 2026.
Mid-Tier IT Companies Poised to Outperform
Despite sector-wide challenges, JM Financial sees mid-tier IT companies performing better than their larger peers. The valuation gap between mid-tier and large-cap IT firms widened to about 60% in March 2026, up from 39% the previous month, signaling stronger recent performance from mid-sized companies. This gap is notably higher than the five-year average of around 31%.
Furthermore, FY27 Earnings Before Interest and Tax (EBIT) estimates for mid-tier IT firms have seen a more significant upward revision of 5.9% since April, compared to a modest 0.8% for large-tier companies. The depreciation of the Indian Rupee by 5.7% over the last three months has contributed to these revisions. Mid-tier firms are actively working to improve cash flows, with Mphasis aiming for 80% operating cash flow to profit after tax (PAT) conversion and Coforge targeting 100% free cash flow to PAT for FY27.
Key Company Picks and Sector Trends
JM Financial has identified preferred investments. Infosys is a top pick in the large-cap space, while Mphasis is favored among mid-tier companies. Sagility is also highlighted as a preferred choice in the business process outsourcing (BPO) category.
The firm noted that while order book growth for large Indian IT companies was decent in FY26 compared to FY25, Cognizant's comments on longer deal durations require monitoring. The financial services sector remains a stable area, supporting strong technology spending from major banks and offering a positive trend amidst a generally cautious demand environment.
ER&D and BPO Segments Show Varied Performance
Engineering Research and Development (ER&D) companies reported mixed results for the fourth quarter of FY26. Tata Technologies achieved double-digit organic constant currency revenue growth in FY27, driven by the successful launch of full-vehicle deals. However, KPIT Technologies did not provide explicit revenue guidance for FY27, expecting a slower first half due to the conclusion of significant software-defined vehicle programs before new account growth can offset the impact.
In the BPO segment, FY27 guidance is more moderate compared to FY26 but remains healthier than other IT segments. Sagility anticipates low double-digit constant currency growth in FY27, slightly lower than the 15% year-on-year organic growth in FY26. Firstsource projects 8-11% organic growth for FY27, with acquisitions expected to add about 2%, building on its 9.8% organic growth in FY26.
Margin Outlook and Valuations
Analysts had expected ongoing margin pressure due to intense competition and client expectations for AI-driven productivity gains. However, the recent depreciation of the Indian Rupee is expected to offer temporary support to profit margins. Key factors to watch include wage increase timing and scale, as well as hiring plans for new graduates and net headcount changes.
The Nifty IT index is currently valued at about 17 times one-year forward consensus earnings per share (EPS), compared to global IT services companies trading at approximately 11 times. This valuation is below its pre-pandemic three-year average of 18 times. The index also trades at a roughly 10% discount to the Nifty 50, differing from its pre-pandemic five-year average of being at par. Mid-tier IT firms are valued at approximately 24 times one-year forward consensus EPS, ER&D service providers at around 25 times, and BPO companies at roughly 21 times.