Citi Research has released a cautious outlook for the Indian Information Technology (IT) sector, forecasting a slowdown in growth for the third consecutive fiscal year in FY26. Despite the sector’s historical resilience and global significance, Citi’s analysis highlights multiple challenges including subdued client spending, heightened competition, and evolving demand dynamics, which together are weighing on growth and margins. Among the large-cap firms, Infosys Ltd. and HCL Technologies emerge as preferred investments, while mid-tier players like Hexaware and Mphasis also receive special mention.
Key Highlights: Growth Slowdown and Margin Pressures
Citi Research projects a modest revenue growth of approximately 4% for FY26, mirroring FY25 levels, indicating a lack of meaningful recovery in near-term growth.
The prolonged slowdown is attributed to a mixture of macroeconomic headwinds and structural shifts, not solely external economic factors.
Client budgets remain tight, with discretionary spending towards IT projects subdued, partly due to global geopolitical tensions and trade uncertainties, especially in key markets like the U.S.
Increasing allocation of client IT budgets towards AI and productivity enhancements has yet to translate into significant revenue gains for service providers, complicating traditional growth avenues.
Citi notes margin pressures increasing from intensifying competition, inflationary costs, and necessary investments in emerging technologies, making cost management a crucial factor.
Preferred Picks and Sector Dynamics
Among large-cap IT companies, Citi favors Infosys and HCL Technologies due to their diversified client portfolios, strong balance sheets, and steady deal pipelines.
For mid-sized companies, Hexaware Technologies and Mphasis are highlighted for their focus on digital transformation services and potential to capitalize on niche market segments.
Tata Consultancy Services (TCS), despite its market leadership, has seen cautious recommendations from Citi due to ongoing challenges including layoffs and skill realignments.
Industry Challenges and Strategic Shifts
Citi points out that the Indian IT sector has struggled to replicate the strong revenue growth rates seen in earlier years, partly because client companies are shifting from traditional outsourcing towards internal innovation and digital transformation projects.
There is a growing trend among key clients to insource or build internal capabilities, as seen in moves like Citigroup’s strategic reduction of contractor usage and emphasis on in-house AI-driven development.
The sector faces the dual challenge of adapting to AI-driven disruption while managing the transition without significant revenue loss or workforce disruptions.
Outlook and Market Implications
Analysts emphasize the need for improved growth visibility and breakthrough technology adoption to catalyze stock performance in the coming fiscal periods.
Despite the challenges, the valuation of Indian IT companies remains relatively high, underscoring cautious optimism by investors balancing growth concerns with inherent sector strengths.
Margin and revenue trajectories will remain under scrutiny as digital transformation demand matures and competition intensifies globally.
Conclusion
Citi’s sober assessment underscores the complexity of the Indian IT sector’s current phase—a mix of external economic pressures and internal structural shifts is tempering growth prospects after years of rapid expansion. While Infosys and HCL Technologies are best positioned to navigate the slowdown, the overall sector must innovate strategically and manage costs deftly to regain momentum. For investors and industry watchers, the coming year will be critical in defining the sector’s post-slowdown trajectory.
Sources: NDTV Profit, CIO Insider, Economic Times, Republic World
