Key Points

The report highlighted that while the industry is facing delays in client decision-making, the overall sector remains supported by strong deal pipelines and rising adoption of artificial intelligence (AI).

This combination, it said, will ensure moderate but steady growth, even though short-term performance continues to reflect challenges.

"We believe the medium-term outlook remains cautiously optimistic, backed by strong deal pipelines and increasing AI adoption, though tempered by macroeconomic headwinds and client spending caution leading to delayed decision making," the report said.

The report also stated that it continues to have greater comfort in Tier-1 IT companies and a few select Tier-2 companies because of their steady performance and relatively better valuations.

It reiterated a positive stance on the sector and advised investors to consider the brokerage's preferred picks within the IT space.

On the performance front, Tier-1 IT companies reported muted revenue growth, ranging from around -3.3 to 2.6 per cent on a quarter-on-quarter constant currency basis.

Meanwhile, Tier-2 IT firms under coverage showed mixed results, with some delivering stronger performance than others.

In terms of market performance, the Nifty IT Index has underperformed significantly over the past year, falling by nearly 13 per cent, compared to a 2 per cent rise in the Nifty50 index.

The underperformance has largely been driven by macroeconomic uncertainties, subdued client spending, and muted Q1 results across the industry.

Looking ahead, IT services companies continue to provide cautious but positive revenue growth guidance for FY26, underpinned by robust deal pipelines.

However, the report noted that persistent macro uncertainties and cautious IT spending will likely keep the overall pace of growth moderate.

Key risks to the outlook include rupee appreciation or adverse cross-currency movements, sustained macroeconomic headwinds, and the possibility of a recession in the United States, which could weigh on global technology spending.

- ANI