HSBC has revised its outlook for India’s IT services sector, upgrading Infosys and LTIMindtree to “Buy” while downgrading TCS to “Hold” and Tech Mahindra to “Reduce.” The brokerage expects sector growth to accelerate to 6% in FY26 from the current subdued 3-4% in FY24-25, driven by recovery in the US market and broader adoption of generative AI (GenAI) in business applications.
The US market is expected to lead demand recovery, particularly in banking and retail, aided by a low base from the past two years. In contrast, Europe continues to face weak demand, which offsets some of the gains from the US. HSBC highlights that while technology GenAI adoption has been rapid, business-focused projects are likely to pick up pace only by next year. Global capability centres (GCCs), which have taken market share from Indian IT players, are seeing their growth moderate.
Margins across the sector are likely to remain at FY24 levels as operating metrics, such as utilization and offshore mix, are already at their peak. HSBC suggests structural adjustments, such as hiring younger engineers, to reduce costs, though these measures may take time to yield results. INR depreciation remains a potential upside risk for margins.
Among stocks, HSBC upgraded MphasiS to “Buy” and Wipro to “Hold,” while downgrading Coforge to “Hold.” It remains less constructive on mid-tier companies due to decelerating growth and high valuations. The firm’s top picks include Infosys, LTI Mindtree, and MphasiS for their favorable risk-reward profiles.
With improving growth trends, HSBC anticipates that the IT sector will perform in line with or better than the broader market in 2025, drawing investor interest as valuations in other sectors remain high despite demand challenges.
