Mid-Sized IT Firms Seen Outpacing Larger Peers in Q2 FY27: Nuvama

The brokerage said the overall demand environment for IT services remained relatively steady during the quarter, although business sentiment weakened in September as geopolitical conditions deteriorated.

As companies enter the upcoming earnings season, Nuvama expects management commentary to focus on geopolitical uncertainty, a subdued macroeconomic environment and the rapidly changing role of generative AI in the technology sector.

These concerns have affected investor sentiment towards IT stocks in recent months. The IT index has declined by around 26 per cent over the past nine months, with investors particularly concerned about the potential impact of platform-led Gen-AI disruption and uncertainty surrounding developments in the Gulf region.

Despite these challenges, Nuvama has retained a positive medium- to long-term view of the IT services industry. The brokerage believes advances in generative AI are more likely to open up new business opportunities for technology companies than fundamentally undermine the existing IT services model.

The report also expects operating margins to improve across most IT companies, helped by efficiency initiatives and tighter cost management.

While some companies could alter their revenue growth guidance during the earnings season, Nuvama expects margin-related guidance to remain largely stable.

The brokerage has also revised its USD/INR assumption to 95 from 93 and updated its valuation framework using average FY28-FY29 price-to-earnings multiples.

Nuvama acknowledged that volatility could remain elevated in the near term but maintained its constructive view of the sector over the medium to long term.

According to the brokerage, relatively resilient demand and the growing adoption of artificial intelligence-led transformation initiatives could provide fresh growth opportunities for IT services companies despite the current uncertainty.