UBS sees mixed outlook for Indian IT sector, mid-tier firms outperform large caps amid AI shift
New Delhi, May 20
The Indian IT services sector witnessed mixed performance in the fourth quarter of FY26, with mid-tier companies outperforming large-cap firms as artificial intelligence-led transformation and macroeconomic uncertainty reshaped client spending trends, according to a report by UBS.
The report stated that after two quarters of earnings beats, the sector saw more misses than expected in Q4FY26, particularly among large-cap IT companies.
It stated, "Clear divergence between mid-tier and large-cap companies... Q4FY26 prints were mixed, with more misses than beats."
According to UBS, companies such as Infosys, HCL Technologies and Wipro reported weaker-than-expected performances and issued lower revenue growth guidance for FY27.
Infosys guided for FY27 revenue growth of 1.5-3.5 per cent year-on-year in constant currency terms, while HCL Technologies projected 1.5-4.5 per cent growth for its services business. These forecasts came below market expectations.
The report noted that management commentary reflected caution due to AI-related deflation and weakness in discretionary spending by clients.
UBS added that consensus earnings estimates have been reduced modestly, with earnings per share (EPS) cuts of 0-3 per cent across most large-cap companies for FY27 and FY28.
However, the report highlighted a clear divergence between large-cap and mid-tier IT firms.
Coforge emerged as a strong performer with a robust outlook, leading UBS to raise its price target for the company by 21 per cent. The brokerage said Coforge's margin improvement was stronger than expected, with margins at 16.6 per cent in Q4FY26 and FY27 guidance of 16.5-17 per cent.
Persistent Systems and Mphasis also maintained healthy growth narratives backed by strong deal momentum.
According to UBS, the overall macroeconomic environment remains subdued as geopolitical uncertainty and tight IT budgets continue to pressure discretionary spending by clients.
The report stated that enterprises are increasingly shifting spending toward AI, cloud and modernisation-related programs while focusing on productivity and cost optimisation.
Among sectors, banking, financial services and insurance (BFSI) and manufacturing remained relatively resilient due to AI-led demand, while retail and communications continued to witness weakness.
Geographically, Europe was seen as a relatively brighter spot, while the Americas remained resilient due to a healthy deal momentum.
UBS said AI initiatives have now become central to the sector's growth strategy.
— ANI
Reader Comments
As someone working in a mid-tier IT firm, this feels like our moment. The large caps have become too bureaucratic. But I'm worried about AI deflation - if we automate everything, what happens to our jobs? 🤔
Finally, some good news for mid-cap IT stocks! I've been holding Persistent Systems for a while, and this report validates my investment thesis. But one must be cautious - the macro uncertainty is real, and Europe's relative strength might not last.
I'm skeptical about these analyst reports. Last year they were all bullish on large caps, now suddenly it's mid-tier. Feels like they're just reacting to short-term trends. Infosys and TCS will bounce back - they always do. 📈
The BFSI resilience is no surprise - banks are always the first to adopt new tech for compliance and cost savings. But retail and communications weakness is concerning. Maybe it's time to diversify portfolios away from IT? 🤷♀️
Interesting perspective from UBS. As someone working in a US-based MNC, I see the AI shift firsthand. Indian IT firms need to move beyond just cost arbitrage to genuine innovation. Mid-tier firms seem to understand this better. Good luck to all navigating this transition! 🚀
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