TCS, Infosys, HCL Tech: Fresh targets for IT stocks amid AI, order challenges post Q3

Domestic brokerage firm Choice Institutional Equities believes that artificial intelligence (AI) is transitioning from a strategic narrative to a core business driver, with Q3FY26 performance underscoring resilient revenue growth despite seasonal headwinds and visible productivity gains reflected in margin expansion.

According to Choice, most Indian IT services companies demonstrated resilience in Q3FY26, reporting flat to nearly 4 per cent quarter-on-quarter (QoQ) revenue growth despite seasonal impacts. This reflects steady enterprise adoption of AI, cloud, and analytics-led solutions. Productivity gains are increasingly evident, with EBIT margins showing up to 240 basis points expansion.

A key driver has been the transition of AI from a strategic theme to a core business driver. "AI is shifting from 'strategic theme' for the industry to business driver, especially in enterprise workload signaling an ongoing transformation in how IT services deliver value," it said noting government's increased focus on AI through higher budget allocations and tax incentives are  expected.

Among outperformers, Coforge Ltd secured strong order intake of $593 million and an executable order book of $1.72 billion, up 30 per cent year-on-year (YoY). Persistent Systems Ltd maintained momentum with double-digit quarter-on-quarter TCV growth, mainly driven by BFSI, healthcare, and AI-led engineering.

Infosys Ltd and Tata Consultance Services Ltd (TCS) reported stable large-deal wins, supported by GenAI, cost optimisation, and vendor consolidation. HCL Technologies Ltd improved pipeline conversion, while Happiest Minds Technologies Ltd saw robust GenAI deal traction. Overall deal momentum suggests a gradual sector recovery, with improving FY27 visibility for AI-led players.

Valuation perspectives from Choice Broking indicate comfort as the industry navigates the AI transition. Tier-I IT services firms are projected to deliver a revenue CAGR of 6.9–13.2 per cent and EPS CAGR of 6.7–22.1 per cent over FY25-28E. Tier-II companies are expected to post a stronger revenue CAGR of 8.2–31.2 per cent and EPS CAGR of 11.5–38 per cent.

Select Tier-II IT players are likely to retain premium valuations, supported by differentiated business models and early investments in AI-led platforms. Leading players such as TCS, Infosys, HCLTech, Persistent Systems, Coforge, and Happiest Minds are leveraging advanced AI, data, and cloud capabilities to secure new business and build long-term supply chain resilience.

A government push to increase the AI Mission budget from Rs 800-1,000 crore in the Union Budget 2026 and the proposal of a tax holiday for foreign cloud providers serving global clients from India-based data centres are also expected to foster sector growth. "This push from GOI, we believe would support structural growth of Indian IT sector ecosystem led by data, cloud and AI area," it added.

Indian IT sector valuations have largely consolidated, providing comfort to selectively evaluate strategically positioned IT services players that are AI-first and proactively investing in AI-led capabilities and initiatives. "We believe such companies are well positioned to benefit from an AI-driven demand recovery, with non-linearity and long-term scalability as key upside levers," said Choice.

It has picked Coforge (Target Price: Rs 1,900), Persistent Systems (Target Price: Rs 7,000) and Happiest Minds (Target Price: Rs 585) remain as its preferred long-term investment ideas under its coverage giving them a 'buy' rating. It also have a 'buy' call on TCS (Target Price: Rs 3,950), Infosys (Target Price: Rs 1,885), Tech Mahindra Ltd (Target Price: Rs 1,925) and Zensar Technologies Ltd (Target Price: Rs 880).

It has given 'add' rating to Wipro Ltd (Target Price: Rs 285), HCL Tech (Target Price: Rs 1,800), Mphasis Ltd (Target Price: Rs 3,040), while LTI MindTree Ltd has a 'reduce' rating from Choice Broking with a target price of Rs 6,150.