PL Capital: Indian IT Sector to See a Tepid Q1FY26; TCS the Only ‘Buy’-Rated Stock
- 2nd July 2025
- 01:00:00 PM
- 4 min read
Mumbai | July 2 – Muted demand, delayed deal cycles, and vertical weakness are expected to weigh on Q1FY26 performance, with currency gains offering only temporary support, PL Capital said in its latest IT sector preview.
India’s bellwether information technology (IT) sector is heading into FY26 on a subdued note, with Q1 earnings likely to disappoint despite it being a seasonally strong quarter. According to PL Capital’s latest earnings preview, Tier I and Tier II IT companies are expected to report weak sequential growth in constant currency (CC) terms, as global clients remain cautious amid tariff-related uncertainties and delays in discretionary tech spends.
“This quarter may reflect the full impact of soft discretionary spending and stretched conversion cycles. While FX tailwinds will prop up reported numbers, underlying trends remain uninspiring,” the report noted.
Currency Gains vs Demand Reality
Cross-currency gains—driven by a weaker USD and stronger EUR/GBP—are expected to offer a one-time lift of up to 400 basis points in reported revenue for Indian IT companies. But PL Capital cautions that this technical benefit masks deeper operational challenges.
The firm expects constant currency revenue for its IT coverage universe to decline by a median 1.2% quarter-on-quarter, while USD revenue may rise just 0.5%. Margin gains are likely to be minimal, as companies continue to face low utilization, deferred wage cycles, and missing operating leverage.
Tier I companies are projected to report a sequential CC revenue decline of around 0.7%, while Tier II players—especially those exposed to auto and consumer tech—could post a sharper 2.5% drop.
Valuations Limit Near-Term Upside
PL Capital points out that IT stocks have rallied significantly in recent weeks, pushing valuations into expensive territory. Tier I and Tier II companies are currently trading at 25x and 33x forward P/E, respectively—well above their 10-year averages.
With weak guidance and limited near-term earnings growth, the report warns that the sector offers limited upside unless visibility improves. Several ratings have been revised in the latest coverage, with TCS the only stock maintaining a ‘Buy’.
PL Capital’s IT Ratings – Q1FY26
| Company | Rating | Target Price (₹) |
| Tata Consultancy Services (TCS) | Buy | 3,980 |
| Infosys | Accumulate | 1,680 |
| HCL Technologies | Reduce | 1,530 |
| Tech Mahindra | Reduce | 1,490 |
| Wipro | Reduce | 250 |
| LTIMindtree | Hold | 5,060 |
| Persistent Systems | Hold | 5,890 |
| Mphasis | Hold | 2,900 |
| KPIT Technologies | Accumulate | 1,390 |
| L&T Tech Services | Hold | 4,300 |
| Tata Elxsi | Sell | 4,830 |
| Tata Technologies | Sell | 550 |
| Cyient | Reduce | 1,150 |
Key Focus Areas This Earnings Season
- Cross-currency vs real growth: Reported revenue gains will largely be FX-led. Constant currency numbers will offer the real growth picture.
- Deal wins vs execution lag: TCVs may remain steady, but project start times and ramp-ups continue to face delays.
- Vertical commentary: Updates on demand in auto, manufacturing, and retail will be key—especially for midcap IT players.
- FY26 guidance tweaks: Infosys and HCL Technologies may revise the lower end of their revenue guidance upward, but major changes are unlikely.
PL View: Selective Positioning Is Key
PL Capital believes Q1FY26 will offer little in terms of new triggers for the sector. While the currency impact will soften the earnings blow, underlying business volumes are under pressure, and discretionary tech budgets remain constrained.
“This is a prove-it quarter for the IT sector. Until volume growth and deal conversions improve, we prefer sticking to companies with scale, execution consistency, and balanced vertical exposure,” PL Capital said.
TCS remains the preferred pick, offering relative stability and visibility in a muted demand environment.
PL Capital
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
