IT stocks brace for more pain post muted Q1 show; analysts share strategy

The Nifty IT index has fallen by 18.3 per cent so far this year, the worst among key sectors. During the same period, Nifty has risen by 4.7 per cent

Investors in India's information technology companies are likely in for pain ahead as muted first-quarter earnings play spoilsport to the worst-performing sector this year at the bourses 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 Nifty 50, and has fallen by 18.3 per cent so far this year, the worst among key sectors. During the same period, Nifty has risen by 4.7 per cent.

 

Year-to-date, 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 (24 per cent) and HCL Technologies (23 per cent). 

 

US President Donald Trump flip-flops on the tariffs front, and tax policies have triggered growing concerns in the US, making the outlook for IT stocks more cautious. Companies flagged continued macro uncertainty and global disruptions from conflicts and supply issues while announcing their June 2025 quarter numbers. 

 

Sandip Agarwal, fund manager at Sowilo Investment Managers, said that while the June 2025 quarter results of IT companies were broadly in line with expectations, revenue growth disappointed in some cases, like TCS, while Infosys delivered a slight positive surprise. "The challenge is that even on margins, it’s a mixed bag."

 

Agarwal said the "massive weakness" in demand is a structural issue that is likely to persist going ahead, along with continued challenges in volume growth. He warned that the second half of the fiscal year will face pressure on both revenue and margins, adding, "We are in for a tough time." 

 

Should investors exit?

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."

 

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.  ALSO READ: Tech sector at inflection point, workforce rationalisation likely: Nasscom 

Various brokerages - from 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 ordering by 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.

  ALSO READ: Tech sector at inflection point, workforce rationalisation likely: Nasscom