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The IT sector has taken a sharp beating in September, with the Nifty IT index falling 11% and emerging as the worst-performing sectoral index during the month.
The decline has been significantly steeper than the 6% fall in the Nifty 50, reflecting growing investor concerns around global technology spending, discretionary budgets, high interest rates and the disruption being created by Generative AI.
With the September quarter earnings season approaching, the focus is now shifting towards whether companies can demonstrate resilient demand, healthy deal activity and improving growth visibility. Analysts expect the upcoming results and management commentary to provide important clues on how quickly the sector can navigate the current period of recalibration.
The sell-off was broad-based, with several large and mid-cap IT stocks witnessing significant declines. LTM fell around 13%, while TCS declined around 12%. Wipro and Infosys dropped around 10% each, followed by Mphasis with a 9% fall. Coforge declined around 7%, L&T Tech, HCL Technologies slipped 6%, while Persistent Systems and Tech Mahindra fell more than 5%.
The weakness came as investors grappled with a combination of subdued discretionary technology spending, elevated interest rates, slowing global growth and uncertainty over how quickly artificial intelligence could reshape traditional IT services.
Vinit Bolinjkar, Head of Research at Ventura, said the recent correction reflected both cyclical macroeconomic pressures and rapid technological changes across the industry.
“The recent retreat in IT sector valuations reflects a mix of cyclical macroeconomic pressures and rapid technological transitions. A slowing global growth outlook and persistent high interest rates have led corporate clients to delay discretionary technology spending,” Bolinjkar said.
Ventura also pointed to the growing influence of GenAI on traditional IT services. The increasing use of AI for routine coding, testing and data engineering could put pressure on effort-based billing models, creating near-term revenue friction for companies even as AI remains a long-term driver of technology spending.
“The IT sector is entering a phase of recalibration rather than retreat. The global technology spending base remains intact, but the mix has shifted toward AI infrastructure, and the cycle is moving from expansion at any cost to digestion and proof,” Bolinjkar said.
Ventura expects companies that can convert AI investments into measurable enterprise outcomes through deeper workflow integration to be better positioned, while businesses dependent on commoditised legacy delivery could face greater pricing and margin pressure. In the near term, however, cost optimisation and cautious client spending could continue to weigh on sentiment.
The September correction has now shifted attention towards the Q2FY27 earnings season. JM Financial Institutional Securities expects another soft quarter for most large IT companies, despite the traditionally stronger seasonal environment.
Against this backdrop, JM Financial said mid-tier Indian IT companies could continue to outperform large-tier players in terms of revenue growth despite macroeconomic uncertainty, AI-led productivity changes and intensifying competition.
The brokerage estimated mid-tier IT revenue growth, including acquisitions, at 2.7% to 13.0% constant currency QoQ, compared with a range of -0.5% to 2.6% for large-tier companies. It expected mid-tier companies to deliver double-digit organic revenue growth in FY27, supported by strong first-half performance, while large-tier companies were working towards mid-single-digit FY27 growth.
“Despite macro uncertainty, AI-led productivity and competition, mid-tier Indian IT companies continue to perform well. Mid-tier IT revenue incl acquisitions expected 2.7–13.0% cc QoQ, largely execution-driven,” JM Financial said.
JM Financial noted that mid-tier IT companies were trading at around a 75% premium to large-tier peers and expected the valuation premium to sustain or potentially widen in the near term because of stronger earnings visibility. The brokerage maintained a preference for Mphasis, Coforge and Persistent.
Emkay, meanwhile, said the broader macro backdrop remained largely unchanged, with limited signs of either meaningful improvement or deterioration. Discretionary technology spending remained restrained as clients continued to remain cautious amid macroeconomic uncertainty.
The brokerage also highlighted a shift in commercial arrangements as customers increasingly incorporated AI-led efficiency gains into renewals, vendor consolidation and cost-takeout engagements.
“Discretionary spending remains restrained; clients cautious amid macro uncertainty. Commercial constructs reset as clients underwrite AI-led efficiency into renewals, vendor consolidation, cost-takeout deals,” Emkay said.
For Tier-1 companies, Emkay expected HCL Technologies, Infosys and Tech Mahindra to lead sequential growth, supported by inorganic contributions, deal ramp-ups and execution. In the Tier-2 segment, Coforge was expected to benefit from the Encora contribution, while Persistent was expected to gain from the ramp-up of its $650 million mega deal, followed by Mphasis, Hexaware and Cyient.
The brokerage also expected Infosys to lower the midpoint of its FY27 revenue-growth guidance, while HCL Technologies was expected to retain the midpoint of its organic growth guidance.
With the September sell-off now behind the sector, the Q2 earnings season will be crucial in determining whether investors see enough evidence of improving deal activity and technology spending. For the IT sector, however, the debate extends beyond the immediate earnings quarter: investors are also assessing how companies navigate the transition towards AI-led delivery while maintaining growth and profitability in their traditional businesses.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
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