Infosys, HCL unlikely to revise upper end of FY26 guidance, says HSBC as it picks IT stocks

HSBC on Friday said the recent rupee weakness has provided cushion to pricing pressure, as it prefers Infosys, Tech Mahindra, LTIMindtree, MphasiS and Hexaware among IT sector stocks. The brokerage said the September quarter is unlikely to show any change in growth trajectory for the sector as demand remains soft. This is led by both AI deflation and macro uncertainty, which may not improve until FY27, it said.

HSBC said the Q2 results season for Indian IT is unlikely to be much different from Q1 as demand weakness persists. 

"Current industry growth is driven by vendor consolidation and cost rationalisation deals, which is a zero sum-game. We have a long-standing assumption that the sustainable growth rate for the sector is unlikely to be more than 4-5 per cent, though over the past three years growth has been below even this trend rate," HSBC said.

While FY24 and FY25 were impacted by loss of share to GCCs, FY26 has been impacted by both AI deflation and an uncertain macro environment, the foreign brokerage said.

"Even though recent US corporate results are quite solid, corporates are still holding back discretionary new initiatives. Assuming less macro volatility in the coming quarters we still expect some recovery in growth in FY27. Accenture guidance for FY26 does allude to some improvement in growth in the coming quarters," HSBC said. 

The foreign brokerage said the rupee weakened 2 per cent sequentially in the quarter and provided a much-needed cushion against the pricing pressure from vendor consolidation deals. The cross-currency movement range in this quarter was minus 10 bps to plus 70 bps.

"For large-tier companies we assume 0-2 per cent QoQ growth (in USD terms), while for mid-tier we assume -1 per cent to +5.5 per cent. We think it's unlikely that Infosys or HCL Tech will change the upper-end of their full year guidance," HSBC said. 

Infosys' guidance for the full year is 1-3 per cent, which is a 0.3-1 per cent CQGR and for HCL Tech it is 3-5 per cent, which is a 0.6-2 per cent CQGR. HSBC does expect some recovery in growth for Wipro alluded to in its Q3 guidance, which it expects to be 1-2 per cent QoQ growth.

HSBC said the long-term stock return trajectory gradient will not only be lower than in the past, but stocks will also be a lot more cyclical around this mean path. 

IT stocks (especially top-tier IT companies) are no longer five-year buy-and-hold compounding stocks; they now require a lot more active management around their cycles/volatility, HSBC said.

"Considering the past three years of low growth and our expectation of a cyclical rebound in FY27, we expect the IT sector to at least perform in line with the broader market. We continue to expect a 2-3 per cent annual impact on growth from AI over the next 3-4 years, with the risk of this impact front loaded," it said.