Why largecap IT stocks are falling ahead of TCS Q1 results today?

Largecap IT stocks such as Tata Consultancy Services Ltd (TCS) Ltd, Infosys Ltd, HCL Technologies and Tech Mahindra Ltd (TechM) fell up to 3 per cent in Thursday's trade, while others such as Wipro and LTM were quoting sideways ahead of the kick start of the earnings season. Stocks fell as TCS is scheduled to report its Q1 results later today and many brokerages see tier I IT firms lagging the tier II players this time. Margins for IT as a pack are seen coming in under pressure in Q1, impacted by wage hikes and AI investments, though partly offset by currency depreciation and  productivity gains. 

TCS fell 2.06 per cent to Rs 2,016.05 apiece on BSE, taking its year-to-date fall to 37 per cent. Infosys declined 2.72 per cent to Rs 1,040.25. TechM dropped 2.06 per cent to a low of Rs 1,428.75. HCL Tech also declined 2.17 per cent to Rs 1,120.50. Investors were wary of any potential negative commentary, especially after IT sector recently underperformance the market,
primarily due to a negative narrative built by Gen AI platform companies, compounded by the Gulf-war related uncertainty.

Nuvama said Q1FY27 is likely to be a soft quarter with Tier-2 companies continuing to outpace Tier-1. 

"Within Tier1 companies, Infosys (up 2.3 per cent CC QoQ) is likely to lead growth, followed by TechM (up 1.2 per cent) while TCS (up 0.1 per cent) is likely to remain stable. HCLT (down 1.1 per cent) and Wipro (down 1.5 per cent) are likely to report a decrease," Nuvama said. 

In the case of margin, MOFSL said Infosys, HCL Tech and Tech Mahindra are expected  to post only a modest sequential improvement, supported by operating leverage and cost  actions. 

TCS margins, it said, may decline due to annual wage hikes, while Wipro could see pressure from weaker operating leverage,  wage hikes, deal ramp-up costs and continued AI investment. 

MOFSL expects sequential CC revenue growth for largecap players to be in the range of minus 1.5 per cent to 2 per cent. Midcaps are expected to outperform , with growth ranging from  minus 1.0 per cent to 4.8 per cent, led by continued large-deal ramp-ups. 

Axis Securities in a note said despite attractive valuations, future growth will depend on an improvement in demand, increased adoption of outcome-based engagement models, and sustained momentum in AI-led deal wins. Key factors to monitor include demand recovery, discretionary
spending trends, deal conversions and ramp-ups, AI monetisation, client budgets, and currency movements to assess the pace of earnings recovery, it said.