Kotak Forecasts FY26 Recovery: IT Stocks Gain Attraction Amid Market Correction

• Indian IT services companies report subdued earnings for Q4 FY24, with analysts pushing recovery hopes to FY2026.
• Recent corrections in IT stocks have made valuations more attractive, particularly for mid-tier IT stocks.
• Q4 growth primarily driven by large and mega deals, but revenue growth guidance for FY2025 missed expectations across the board.

Indian IT services companies face a challenging outlook, with subdued Q4 FY24 earnings and recovery hopes pushed to FY2026. However, recent stock corrections present potential opportunities in mid-tier IT stocks.

Subdued Earnings and Delayed Recovery

Indian IT services companies reported subdued earnings for the fourth quarter of FY24, with muted revenue growth. Analysts have extended the outlook for weak demand and macro uncertainty, pushing recovery hopes back to FY2026. However, recent corrections in the IT stocks have made valuations more palatable, and further correction could make some mid-tier IT stocks more interesting, according to analysts at Kotak Institutional Equities.

Q4 Growth and FY2025 Revenue Guidance

The growth in the IT sector during the quarter ended March 2024 was primarily driven by the ramp-up of large and mega deals and furlough reversals, as the discretionary spending environment remained muted. However, revenue growth guidance for FY2025 missed expectations for all companies. This modest guidance was driven by a weak discretionary spending environment, with companies not expecting improvement in FY2025. There was also a continuation of ramp-downs in existing engagements, albeit at a slower pace, and slower conversion of pipeline to Total Contract Value (TCV) and revenue, according to Kotak Institutional Equities.

Margin Outlook and Top Picks

On the margin front, Tata Consultancy Services (TCS) and Wipro fared better on margin improvement, aided by strong execution on cost-optimization programs. However, the margin outlook reduced for mid-tier companies such as LTI Mindtree and Persistent Systems due to aggressive investments to capture market share. Despite plenty of stock action during results, Kotak Equities’ top picks in the IT sector remain unchanged. They favor Infosys followed by TCS and HCL Technologies in Tier-1 and Cyient in mid-tier.

Conclusion

The Indian IT sector faces a challenging outlook, with subdued Q4 FY24 earnings and recovery hopes pushed to FY2026. However, recent stock corrections present potential opportunities, particularly in mid-tier IT stocks. As the sector navigates through these challenges, investors will need to keep a close eye on developments and adjust their strategies accordingly.