IT Stocks Are Recovering, But a Re-Rating Still Looks Distant

After enduring a challenging FY24 marred by global macroeconomic headwinds and cautious enterprise spending, Indian IT stocks have finally begun showing signs of recovery. However, despite the recent rebound in share prices, analysts caution that a full-fledged re-rating of the sector remains elusive, hindered by weak revenue growth visibility and persistent margin pressures.

Green Shoots Emerge in the IT Sector

India’s top-tier IT companies — including Tata Consultancy Services (TCS), Infosys, HCLTech, and Wipro — have witnessed a modest recovery in stock performance over the past two quarters. The Nifty IT Index is up nearly 10% in the last three months (as of June 2025), outperforming the broader Nifty 50, which has seen flattish returns in the same period.

This bounce-back comes amid early signs of a pick-up in deal activity, particularly in cost-optimization and digital transformation projects. Additionally, stabilization in attrition rates and improved utilization metrics have boosted investor sentiment.

“Deal pipelines are healthy again, especially among mid-sized players. Clients are slowly moving from delay mode to decision-making mode,” said Ritika Mehta, IT sector analyst at Ambit Capital. “But this is more of a tactical rebound than a structural inflection point.”

Revenue Growth Still Muted

Despite this upward price momentum, analysts note that topline growth continues to be tepid. Most Tier-I IT companies have projected only low single-digit revenue growth for FY26, a far cry from the double-digit growth rates seen during the pandemic-fueled digital wave.

Infosys, for instance, has guided for 4–7% revenue growth in FY26, while TCS has refrained from giving any formal guidance but hinted at subdued client spending in the banking and telecom sectors.

“There’s no doubt that the worst may be behind us. But the recovery is more sentiment-led than fundamental-led,” said Manoj Desai, Senior Research Analyst at ICICI Securities. “The lack of strong revenue momentum and margin levers means earnings upgrades — and by extension, a valuation re-rating — are still some time away.”

Margin Outlook Under Watch

Margins continue to face headwinds due to wage hikes, higher onsite costs, and delayed ramp-ups. While companies have managed to control attrition — which had surged to over 25% in 2022 — through fresher hiring and internal upskilling, cost optimization alone may not be enough to drive a significant expansion in EBIT margins.

TCS and Infosys reported operating margins in the range of 20–21% in the last quarter, slightly lower than pre-COVID averages of 23–25%.

“There are structural pressures on margins due to tighter pricing and increased competition, especially from global players,” noted Priya Banerjee, VP – Technology Research, HDFC Securities. “We need to see either stronger pricing power or a return of discretionary tech spends to lift margins sustainably.”

Valuation Remains a Key Hurdle

The valuation of IT stocks, while no longer at pandemic highs, still remains elevated by historical standards. The Nifty IT Index is trading at a forward P/E of around 23x, compared to its long-term average of 18–20x. Without meaningful earnings upgrades, analysts believe the scope for further price rerating is limited.

“The current valuation already factors in a near-term recovery,” said Amit Khemka, Fund Manager at DSP Mutual Fund. “Unless we see significant positive surprises in earnings or deal wins, investors should temper their expectations.”

Midcaps Outperform Largecaps

Interestingly, the midcap IT space has outshone its larger peers in the recent rally. Companies like Persistent Systems, LTIMindtree, and Coforge have delivered returns of 15–25% in the last quarter, supported by agile execution, niche capabilities, and sectoral tailwinds in BFSI and healthcare.

However, experts warn that these stocks come with higher volatility. “Midcap IT has higher earnings leverage and can outperform in an upcycle, but they also correct sharply during downturns,” said Neha Jaiswal, Portfolio Strategist at Edelweiss Wealth.

Global Trends Still Dominant

The trajectory of Indian IT stocks is also heavily influenced by global cues — especially the U.S. tech spending environment, interest rate decisions by the Federal Reserve, and overall enterprise confidence.

With U.S. inflation data showing signs of easing and the Fed expected to begin rate cuts later this year, investor sentiment towards technology may continue to improve. However, it is unlikely to result in a sharp uptick in discretionary spending by global clients in the short term.

“Clients remain cautious about large-scale digital transformation projects,” said Kunal Shah, IT Sector Head at Emkay Global. “They want quick ROI and shorter deal cycles, which means vendors have to stay nimble.”

Investor Outlook: Cautiously Optimistic

For investors, the recent uptick in IT stocks offers a glimmer of hope after nearly 18 months of underperformance. Yet, the broader narrative remains one of guarded optimism rather than euphoria.

“Investors looking at IT should do so with a 2–3 year horizon,” said Amit Khemka. “The sector is unlikely to deliver outsized short-term gains, but selective stock picking — especially among midcaps — can deliver alpha over time.”

While Indian IT stocks are undeniably in recovery mode, a sector-wide re-rating is still not on the cards. Structural challenges around revenue growth, margins, and global demand cycles continue to weigh on the outlook. For now, the rebound appears more like a relief rally than the beginning of a new growth cycle.