Coforge, Tech Mahindra, TCS, Infosys among top IT stock picks: Kotak

IT services companies faced a challenging March 2025 quarter, marked by project delays and cautious spending due to upcoming reciprocal tariff announcements. Kotak Institutional Equities noted that mid-tier companies outperformed larger firms, particularly in the manufacturing and retail sectors, which were hit hardest by revenue declines.

Revenue growth forecasts for FY2026 have expanded to include a 3% range, reflecting uncertainties over US tariff hikes. This guidance, however, may be a bit optimistic at the upper end. Kotak suggests that growth forecasts are based on a US slowdown but not a recession, with certain market segments deemed non-viable.

All large IT companies witnessed a sequential revenue decline in constant currency (CC) terms, a trend not seen since June 2020. The Financial services segment, however, remained stable. Despite this, headcounts rose as companies prepared for growth. EBIT margins increased year-on-year for all except TCS, aided by rupee depreciation and aggressive expense management, Kotak said. 

Mid-tier companies like Persistent Systems and Mphasis reported strong growth, driven by a favourable revenue mix and reduced concerns over deflationary risks from new technologies. This trend is expected to continue, allowing these firms to outpace their larger counterparts. Kotak suggests Tech Mahindra, TCS, Infosys, Coforge, and Indegene as key investment picks.

The emergence of GenAI is expected to impact IT services growth by 2-3% over the next two to three years, starting in CY2025. "GenAI opens up new opportunities," Kotak noted, but also warned of deflationary pressures, particularly for incumbents. Challengers may benefit as technological expertise becomes more evenly distributed.

Kotak emphasised that balancing efficiency in existing businesses with market share gains through disruptive propositions will be crucial as AI adoption progresses. The overall impact of AI on demand could eventually stabilise or turn positive.

FY2026 is anticipated to be another year of low single-digit growth for incumbents, compounded by GenAI risks. "FY2026 will mark another year of low single-digit growth for the incumbents, not encouraging, especially with potential deflationary GenAI risks for the sector," Kotak stated.