Red alert: IT stocks rally, TCS up 1% but sector pain to return

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26 Aug, 2025 12:21

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Technology stocks are returning to buyers' radar after bout of panic selling post few company's earnings red alert.  The IT index which lost over 2 percent on Thursday is seeing buying today with the index in green on a day when the benchmark indices are down almost 1 percent intraday. TCS which lost 5 percent yesterday, climbed 1 percent intraday on Friday.

However, things are not rosy for the IT sector and analysts warn that pain is going to linger. Stating that 9 of 11 companies have moderated growth outlook, Nomura says demand slowdown is broad-based and distributed across verticals, with concerns related to macro, uncertainty due to Brexit and discretionary pullbacks being commonly cited.

Sample this, BSE IT index lost 8 percent in year-to-date when the Sensex and Nifty gained 11-12 percent. In a month period, BSE IT was down 7.5 percent when both the benchmark indices gained 3 percent each. Bruise on the IT stocks intensified after Britain voted to exit European Union on June 23. From June 23, IT index fell 12 percent while both Sensex and Nifty were up around 8 percent.

After TCS indicated caution about its Q2, top three IT companies lost around  Rs 30804 crore market cap. Out of the total, around Rs 24797.8 crore was knocked in a day’s trade on Thursday.

Nomura says that Banking and Financial Services Solution (BFSI) in particular has issues with pricing pressure, delays in decision making and discretionary pullbacks while healthcare demand is impacted due to ongoing large payer M&A and election-related uncertainty. It warns that large clients common to tier 1 IT companies are seeing growth issues.

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Nasrin Sultana

Special Correspondent|Moneycontrol.com

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Last week, Mindtree issued Q2 guidance warning stating that revenue decline is expected due to cross-currency movements, project cancellations and slower ramp-ups in a few large clients across different verticals and continued weakness in its UK-based subsidiary Bluefin. Mindtree is also cautious that its Q2 margins are going to be lower than planned with a decline in EBITDA margins in Q2 FY17 compared to Q1 FY17. Cognizant, too, slashed its full-year revenue forecast for the second consecutive quarter.

Historically, Q2 is a seasonally strong quarter for industry but with caution in spending, revenue growth would decelerate in constant currency terms.

Stock picking

Nomura has a buy rating on HCL Technologies and neutral on Infosys, Tech Mahindra, TCS and Wipro.

CLSA expects near-term softness to impact most firms and shave USD revenue growth by 1-2 percent and earnings by 2-7 percent for FY17-19. It has buy rating on HCL Technologies and TCS, outperform on Wipro and Infosys but downgraded Tech Mahindra to sell. “Indian IT firms now trade at 2SD below their three-year average, more than adequately pricing in the near-term softness and suggesting they have bottomed out in an otherwise rising market,” it says in a note.

Morgan Stanley thinks TCS to be an expensive stock even after retracing 16 percent since its peak in last three months.  It expects USD revenue growth of 1.8 percent quarter-on-quarter for TCS in Q2  andmargins to show a 20 basis points (bps) uptick.

Morgan Stanley has lowered USD revenue by 2–4 percent, EBIT margins by 30-40 bps, and earnings by 3–5 percent.

With a slowing growth trajectory, it adds that it would be difficult for the company's margins to recover to over 26 percent levels over the coming quarters. ICICI Securities has a add rating with a revised target price of Rs 2516 per share.

Bright spots

CLSA expects demand to recover in early FY18, washing out FY17 growth rates. It adds that pace of the spending pullback has surprised several firms with customer caution before the US elections and a lower interest rate environment as the commonly cited reasons.

Betting on the brighter side, the brokerage firm thinks that an increase in interest rates or a more hawkish environment triggered by the US Fed could drive a recovery in spending by US banks. Also it states that a Democratic victory in the US presidential elections (on 8 November) should see a quicker end to US elections-led caution than a Republican victory. "Either event could drive pent-up spending from deferred projects," it says in a note.Follow @NasrinzStory