Investors in India’s information technology (IT) companies are likely in for more pain ahead as muted earnings for the first quarter of 2025-26 (Q1FY26) play spoilsport at the bourses in the worst-performing sector this year amid macro uncertainties.
Investors, analysts suggest, can look for better opportunities in the markets as things stand.
The Nifty IT index is set for three straight quarters of underperformance against the benchmark Nifty50, and has fallen by 18.4 per cent so far this year, the worst among key sectors.
Year-to-date (YTD), all 10 constituents of the index have declined, led by Oracle Financial Services, with a fall of 32 per cent, followed by Tata Consultancy Services (25.5 per cent), and HCLTech (23.5 per cent).During the same period, Nifty has risen by 4.8 per cent.
US President Donald Trump’s flip-flops on the tariff front, and tax policies have triggered growing concerns in America, making the outlook for IT stocks more cautious. Companies flagged continued macro uncertainty and global disruptions from conflicts and supply issues while announcing their Q1FY26 numbers.
Sandip Agarwal, fund manager at Sowilo Investment Managers, said that though the Q1 results of IT companies were broadly in line with expectations, revenue growth disappointed in some cases, like TCS, while Infosys delivered a slightly positive surprise.
“The challenge is that even on margins, it’s a mixed bag,” Agarwal said.
He further said that the “massive weakness” in demand is a structural issue that is likely to persist going ahead, along with continued challenges in volume growth. Agarwal warned that the second half of the financial year will face pressure on both revenue and margins.
“We are in for a tough time.” he averred.
Agarwal sees more pain in the upcoming quarter, with September likely to bring a little relief, given that growth in India is primarily first-half-driven.
In the second half of the year, December typically sees holiday-related breaks, with many manufacturing units going on furlough.
The only opportunity for growth is in the first half, and the first quarter has already been poor, he said.
“Even if the second quarter is slightly better, I don’t think it can make up for what we’ve lost,” Agarwal added.
The IT sector is in a wait-and-watch mode, with stocks likely to move sideways.
Fundamentally, this sector doesn’t deserve to be where it is, Agarwal said.
Various brokerages, including JM Financial and PL Capital, are underweight on the IT Services pack.
Analysts at PL Capital noted that they remain underweight as the current phase of global uncertainty will result in slow orders from clients.
“IT remains the lowest-performing major sector so far this year.
"There are no strong near-term triggers that would lead to a major outperformance from here.
"The Trump-era tariffs continue to have an effect, and this impact is likely to persist until there is more clarity on the matter,” said Sanjeev Hota, vice president-head of research at Mirae Assets Sharekhan.