Moneycontrol Pro Panorama | Tech tensions

Clients are maintaining a cautious stance amid macroeconomic uncertainty and ongoing technology shifts driven by artificial intelligence.

Dear Reader,

India's information technology sector is navigating treacherous waters as the earnings season approaches, with stocks under significant pressure from multiple headwinds. The Nifty IT index plummeted around 1.25 percent on Monday, making it the worst-performing sector, as investors grappled with escalating geopolitical tensions and subdued growth prospects.

The immediate catalyst for Monday's selloff was President Donald Trump's warning about potentially raising tariffs on Indian imports if the country continues purchasing Russian oil. Having already doubled tariffs to 50 percent in 2025, Trump's latest threat has rattled investor confidence. The threat of further H-1 B visa restrictions amplifies these concerns.

The rupee's continued weakness—heading towards its ninth decline in ten sessions near the 90.25 level—adds another layer of complexity. While currency depreciation typically benefits export-oriented IT firms through enhanced revenue realisation, analysts warn that these gains will likely be offset by wage increases.

As the third-quarter earnings season kicks off this week, market participants are looking beyond immediate results to gauge longer-term trends. Seasonal factors, including holiday furloughs in key markets like the United States and Europe, are expected to weigh on sequential growth. Brokerages anticipate that large-cap IT companies will post modest constant-currency growth of 0.3 percent to 2.3 percent quarter-on-quarter while mid-cap players may show a wider range, from negative 2.5 percent to positive 3.5 percent.

The demand environment remains challenging, with discretionary spending still under pressure. Clients are maintaining a cautious stance amid macroeconomic uncertainty and ongoing technology shifts driven by artificial intelligence. HSBC has notably downgraded its outlook, declaring that IT is "no longer a long-term double-digit compounding sector", suggesting that stocks will exhibit greater cyclicality, going forward.

However, there are glimmers of hope on the horizon. Analysts expect calendar year 2026 to represent the bottom of the growth cycle, with meaningful acceleration anticipated in the second half of fiscal 2027 and beyond as AI services move into scaled deployment. Early signs of strategic AI positioning are emerging, with major firms like TCS, Wipro, and Coforge making acquisitions to build AI capabilities. Leading large language model providers are establishing structured partnerships with system integrators, suggesting that the AI services layer is beginning to formalise.

Among verticals, the BFSI segment shows promising momentum, aided by interest rate cuts. However, communications, manufacturing—particularly automotive—and engineering research and development sectors remain under pressure due to tariff uncertainties.

Brokerage recommendations reflect this mixed outlook. Jefferies expects growth to improve slightly to 4.7 percent year-on-year in fiscal 2027, but cautions that valuations are unlikely to re-rate, given risks to consensus expectations. The firm favours mid-sized names such as Coforge, Sagility India, and Mphasis, along with large caps Infosys and HCL Technologies.

As management commentaries unfold this earnings season, investors will scrutinise client budget trends, AI monetisation progress, and the impact of visa dependencies. The sector's ability to navigate geopolitical headwinds while capitalising on emerging AI opportunities will determine whether 2026 marks an inflection point or prolonged stagnation.

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