Nuvama bets on Tier-2 IT players for strong growth; sees stability returning to Indian IT despite macro headwinds
Sector Outlook: Signs of Stability Post Q1 Turbulence
As Q2FY26 results approach, brokerage firm Nuvama Institutional Equities expects the Indian IT sector to show early signs of recovery after a challenging Q1, largely affected by tariff uncertainties and macroeconomic concerns.
- Most companies under coverage are projected to post sequential revenue growth.
- Only Birlasoft and Zensar are likely to report minor declines.
Tier-2 IT Firms Poised to Outperform
Tier-2 IT players continue to shine as growth leaders, with Nuvama highlighting Coforge, Persistent Systems, Hexaware, LTIMindtree, and Mphasis as preferred stock picks.
- Coforge is expected to lead the pack with 6% QoQ growth in constant currency (CC) terms.
- Persistent Systems: 3.7% QoQ CC growth, driven by robust digital engineering demand.
- Hexaware: 3.2% QoQ growth, reflecting steady expansion in BFSI and healthcare verticals.
- LTIMindtree and Mphasis are seen delivering 1.9% and 1.3% QoQ CC growth, respectively.
“Tier-2 names continue to post strong growth and remain our preferred picks,” Nuvama noted, reinforcing confidence in mid-sized digital-first firms.
Tier-1 IT: Gradual Uptick, But Slower Than Midcaps
While Tier-1 IT firms are expected to stabilize, growth remains relatively modest. Infosys and HCL Tech are seen as top performers among the large caps.
- Infosys: Estimated 1.8% QoQ CC growth, with full-year revenue guidance likely maintained at 1–3%.
- HCL Tech: Projected to grow 1.5% QoQ, maintaining 3–5% full-year outlook.
- Tech Mahindra: Expected to grow 0.9%, while TCS and Wipro lag with 0.2% and 0.1% QoQ CC growth, respectively.
Despite weak growth in TCS and Wipro, Nuvama remains selectively positive on Infosys and TCS due to their long-term resilience.
Sector Risks and Near-Term Uncertainty
The sector continues to grapple with global headwinds such as:
- US H1B visa fee hikes
- The proposed HIRE Bill
- Tariff policy shifts affecting cross-border talent movement
However, Nuvama believes these challenges have not materially impacted demand yet. Instead, growth is being driven by:
- Cost-takeout deals
- Shift from discretionary to critical tech spending
- Renewed interest in modernizing legacy systems
Engineering R&D and Small-Cap Trends
Engineering R&D players are expected to post modest performance, primarily due to auto sector weakness.
- LTTS: Expected to grow 1.5%
- Cyient: Minimal growth at 0.3%
Among small caps:
- Firstsource: Projected to grow 2.2%
- Birlasoft and Zensar may decline 0.5% and 0.1%, respectively.
Valuation and Investment View
Following recent stock corrections, Nuvama sees improved risk-reward opportunities across the IT sector, particularly in Tier-2 stocks.
- The brokerage maintains a medium-to-long term positive view.
- Margin guidance is expected to hold steady across most companies.
“We remain positive on the sector from a medium-to-long term perspective,” said Nuvama, underlining the resilience of IT demand despite current macro risks.
Nuvama Institutional Equities expects a stable Q2FY26 for Indian IT, with Tier-2 players like Coforge, Persistent, and Hexaware leading growth. While Tier-1 firms show slower momentum, Infosys and TCS remain favored large-cap picks. Despite macro uncertainty, structural demand for IT transformation remains intact.
