Nomura expects IT firms to see 'anaemic' growth in FY27. Here are latest target prices for Infosys, TCS, and others

With Q1 earnings season knocking on the door, Nomura believes that the long-term target market for Indian IT would expand, although the near-term growth is likely to remain anaemic.

In its latest note, the international brokerage said that Indian IT services companies, especially the large caps, are in the middle of a “perfect storm of two key headwinds”. Macro uncertainty arising from the seesaw political game in the Middle East and uncertainty around rates, particularly in the US, was named the first set of headwinds that is keeping client spending subdued at the margin level.

Nomura also highlighted that when tech spending from clients is not increasing, there is heightened competition among IT services companies, and the economic dividend of AI is being immediately surrendered to clients. With firms like Accenture indicating the lingering impact of the war on growth would continue in the near-term, Nomura believes FY27 is likely to be another subdued year.

The international brokerage expects the upcoming earnings season to be sombre for IT companies with weak quarterly growth trends from most of the large caps. It expects Wipro to report the weakest earnings at -1.3%, while Tech Mahindra is expected to report strong growth at 1%.

“We expect midcaps in general to continue posting stronger growth vs large caps. We do not expect any changes to the annual guidance from Infosys and HCL Tech, and expect Wipro to guide -1% to +1% revenue growth in Q2 FY27,” it added. Nomura lowered its revenue growth estimates by 100-200 bps for FY27-28.

Nomura's optimism on long-term opportunities for IT

While doomsday prophets continue to debate over the future of IT companies as artificial intelligence takes the centre stage, Nomura believes that the fear of these frontier models' implementation at enterprises displacing IT services vendors is overblown, as the context matters and tolerance for errors is zero.

The international brokerage explained this with the example of Waymo, a leading autonomous vehicle technology company and a subsidiary of Google-parent Alphabet. It highlighted that replacing the human driver took significant efforts and investments in edge case training and data that exists nowhere on the internet.

“Similarly, expecting a deployed frontier model to run autonomously and displace humans in enterprises entirely is oversimplistic, in our view. In fact, in a world where digital agents and human workforce are going to become the norm, the role of a system integrator would become ever more critical as an orchestrator, a guardian of controls and privy to the context of the enterprises becomes even more crucial,” it added.

Indian IT companies have an opportunity to increase their total addressable market by expanding from traditional tech spending into operational spending, Nomura said, adding that it believes that currently a deflationary phase is on, where the productivity gains are being returned to the clients upfront while the gains from market expansion will come with a lag.

Nomura lowered its target multiples for IT stocks under its coverage by up to 20%. It downgraded its rating on Tech Mahindra to ‘Neutral’ from ‘Buy’. “Overall, we think midcap stocks’ growth outperformance vs large caps will continue. We think multiples for the sector could rise once confidence in AI’s long-term growth potential starts to emerge. Our top picks are Infosys and Cognizant (both large caps), Coforge (midcap) and eClerx (small cap),” it added.

Here are Nomura’s latest target prices for IT stocks.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

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