Negatives mostly priced in for tier 1 IT companies; correction likely in midcaps: Sunny Agrawal
, Head of Fundamental Equity Research,
SBI Cap Securities
, says The IT sector faces a weak demand environment as clients seek productivity gains through Gen-AI while expecting cost benefits. While tier I IT company negatives are priced in,
midcap IT firms
face potential correction due to expensive valuations.
KPIT Tech
is expected to deliver muted growth commentary for FY26 amid global automobile industry uncertainties.
What is your take on the IT pack? The market has digested
TCS earnings
and given that the company is not that bullish on the growth outlook and are anticipating some pressure on discretionary spending, we have already seen very tepid moves coming in the other IT majors as well. But within the lot,
KPIT Tech
is holding on to the gains of 2% right now. How do you analyse the overall IT space and any stock that you would like to bet on in this correction?
Sunny Agrawal:
The way the commentary of
TCS
and
Tata Elxsi
has played out, it clearly seems there is a lot of uncertainty in terms of demand environment and at the same time, clients want to increase productivity using various Gen-AI tools and at the same time they want the benefit to be passed on to him or her.
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So, overall, a pretty weak demand environment as far as the IT sector is concerned. Coming to a stock specific action or price action, most of the negatives are already in the price at least for tier I IT companies – be it TCS,
Infosys
or
HCL Tech
.
The issue is with the midcap IT companies. The valuations are very expensive there compared to their largecap peers. In case the demand environment or the commentary is on weaker front from midcap companies, we see a sharp correction in the midcap IT pack.
Moving on to the KPIT, the company during the mid-quarter update has already alerted the street that the deal execution is not playing out as per expectation and the deal wins are likely to slow down. Thus the negative news is already priced in for KPIT Tech and any positive development on the automobile side can act as a positive.
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But given the trade uncertainty going on in the global automobile industry, the transition from ICE engine to electric or for that matter hybrid, the dynamics of the industry are changing very rapidly. We expect KPIT to deliver a very muted set of commentary as far as growth for FY26 is concerned. So, let us wait and see what is the commentary of management on KPIT.
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