Brokerage firm JM Financial has initiated coverage on Indian IT services companies with a selective approach, citing muted growth, intensifying competition and limited scope for margin expansion. The brokerage has initiated two pair trades, recommending an 'Overweight' stance on Tech Mahindra and an 'Underweight' stance on Wipro.
It has also taken an 'Overweight' view on Mphasis against an 'Underweight' stance on LTIMindtree. Among its preferred names, JM Financial has highlighted Sagility and Mphasis. According to JM Financial, investor discussions point to four key debates for the sector: an increasing focus on growth that could intensify competition and pricing pressure; the trajectory of margins amid higher competitive intensity, with currency movements an additional variable; a relatively weaker setup for Accenture entering FY27 due to its low exit rate; and the read-through from recent software results.

The brokerage expects the benefits for Indian IT services companies from improving software demand to become more visible as enterprise adoption of artificial intelligence moves from experimentation to scaled deployment. However, it cautioned that productivity-led revenue deflation could remain a near-term offset."Given the near-term challenges to growth, rising competitive intensity and limited margin upside, we remain selective," JM Financial said.
Growth remains a concernManagement commentary from Tech Mahindra, Infosys and Wipro points to intensifying competition, according to the brokerage. JM Financial said that vendors are increasingly absorbing productivity gains from generative AI into pricing, even as the benefits realised by clients remain relatively lower.

The brokerage expects this to mark the fourth consecutive year of growth softness for the sector. It also expects IT services vendors to prioritise growth over margins in the current environment. JM Financial estimates FY28 constant-currency revenue growth at 4.1%, compared with 3.5% for FY27.
Currency tailwind masks margin pressureThe Indian rupee's depreciation has provided a significant tailwind to IT services margins, according to the brokerage. JM Financial estimates that around 7% rupee depreciation in FY27 could provide a 100-120 basis point margin benefit, effectively masking weaker organic margin performance.

The brokerage warned that any stabilisation or appreciation in the rupee, coupled with increasing competitive intensity, could pose a risk to consensus margin estimates. The NSE IT index has underperformed the Nifty by around 12% on a calendar year-to-date basis, JM Financial said.
Against a backdrop of muted growth, rising competitive intensity and limited margin upside, the brokerage remains cautious on the sector. JM Fin's stock views and target pricesCosRatingTPInfosysADD1,125HCLTechREDUCE1,120WiproREDUCE160TechMADD1,680LTIMindtreeREDUCE3,980MphasisBUY2,740SagilityBUY55