AI Can’t Save Q1: India’s IT Sector Struggles Despite Tech Push

Indian IT companies are set for a tepid Q1FY26, with brokerage firm Prabhudas Lilladher predicting weak revenue growth and margin pressures. Despite this, firms like TCS, Infosys, and Mphasis remain relatively resilient, though valuation concerns have led to rating downgrades.

Indian IT companies are expected to report subdued performance for Q1FY26, as global demand uncertainty and margin pressures weigh on earnings, according to a preview report by Prabhudas Lilladher (PL), a leading Mumbai-based financial services firm.

PL estimates that the median revenue for the sector will decline by 1.2% in constant currency terms, and grow by a modest 0.5% quarter-on-quarter (QoQ) in USD terms. Despite some relief from favorable cross-currency tailwinds—with the euro and pound gaining 5.9% and 7.6% respectively against the USD—the overall picture remains weak.

“Q1 is typically strong for IT firms, but this time global caution and soft demand, particularly in tariff-sensitive sectors, will hurt growth,” PL stated.

Sector Highlights and Stock Ratings

• Tata Consultancy Services (TCS), Infosys, Mphasis, and Persistent Systems are seen as resilient due to lower reliance on discretionary spending.
  
• However, PL downgraded Infosys from Buy to Accumulate and both Mphasis and PSYS from Buy to Hold, citing recent rallies and stretched valuations.
  
• The BFSI vertical is expected to remain stable, while hi-tech and utilities may offer selective upside. Conversely, manufacturing, automotive, and retail/CPG segments are likely to underperform.
  

Tier I and Tier II Performance Outlook

• For Tier I IT firms, PL forecasts a median CC revenue decline of 0.7%, with growth expected only from LTIMindtree, Mphasis, and PSYS.
  
• Tier II companies are projected to see a 2.5% revenue drop, particularly Tata Elxsi and Tata Technologies, due to continued weakness in automotive demand.
  
• EBIT margins are expected to compress:
  
  • Tier I: down 40 basis points to 17.3%
    
  • Tier II: down 20 basis points to 15.4%
    

Valuation Concerns and Slow AI Transition

Despite muted earnings, IT stocks have surged recently. PL cautioned that:

The brokerage also noted that while AI remains a future growth driver, the transition from experimentation to production is slow, and returns on AI investments have yet to materialize.

With global enterprises remaining cautious and demand yet to rebound fully, Q1FY26 looks muted for India’s IT sector. While blue-chip firms like TCS continue to offer stability, the broader industry faces valuation pressures, margin constraints, and earnings challenges. PL’s revised stance encourages selective investing based on execution strength and long-term deal visibility.