Indian IT services companies, especially the large caps, are currently navigating what Nomura calls a "perfect storm of two key headwinds." The first is macro uncertainty arising from the "seesaw political game in the Middle East," while the second is uncertainty around interest rates, particularly in the US. These factors are keeping client spending subdued at the margin level. With firms like Accenture indicating the lingering impact of geopolitical conflicts on growth will continue in the near-term, Nomura believes FY27 is likely to be another subdued year for the sector. The brokerage has lowered its revenue growth estimates by 100-200 basis points for FY27-28 and expects no fireworks from the upcoming Q1 earnings season.
The impact of these headwinds is not uniform across the sector.
This divergence stems from specific company challenges. Wipro is grappling with integration costs from acquisitions like Harman, significant investments required to ramp up large deals, and headwinds in its consulting business, particularly within the BFSI vertical. In contrast, Tech Mahindra is benefiting from margin expansion due to cost-cutting measures and rupee depreciation, a healthy deal pipeline, and traction in the Telecom vertical. Nomura expects Wipro to guide for -1% to +1% revenue growth in Q2 FY27, reflecting its ongoing transformation struggles.
When tech spending from clients is not increasing, Nomura notes there is "heightened competition among IT services companies." This creates a zero-sum game where vendors fight for the same pool of spending, leading to intense competition.
This competitive pressure is affecting margins across the board. Infosys faces pressure from large deal ramp-ups and visa costs, TCS deals with salary hikes and seasonal factors, while Wipro experiences significant pressure from integration costs and large deal ramp-up. The result is a deflationary environment where productivity gains are passed on to clients rather than retained as higher margins.
Despite near-term challenges, Nomura maintains a bullish long-term view on the relevance of system integrators like Infosys and TCS. The brokerage uses Waymo's autonomous vehicle journey as a powerful analogy. Replacing human drivers took "significant efforts and investments in edge case training and data that exists nowhere on the internet." Similarly, Nomura argues that "expecting a deployed frontier model to run autonomously and displace humans in enterprises entirely is oversimplistic." In a world where digital agents and human workforce coexist, system integrators become critical orchestrators, guardians of controls, and the only entities possessing the deep client context that AI models lack. Enterprise technology systems remain highly complex, requiring sophisticated integration capabilities that AI alone cannot provide.
Nomura believes Indian IT companies have a significant opportunity to expand their total addressable market (TAM) by moving beyond traditional tech spending into operational spending. This represents a fundamental shift from project-based, discretionary spending tied to IT budgets, to business-critical, essential spending integrated into operational budgets. The key drivers include AI-driven automation, where IT companies can take over operational processes previously handled in-house; hybrid workforce management; business process integration; and a shift toward outcome-based models tied to business metrics. Nomura expects this transition to occur over 12 to 18 months as businesses move beyond proof-of-concept deployments and scale AI investments.
We are currently in a "deflationary phase" where "productivity gains are being returned to the clients upfront." This creates several dynamics: immediate price compression as IT companies are forced to pass on AI-driven efficiency gains; competitive pressure accelerating the transfer of productivity gains; proof-of-concept pricing with vendors absorbing implementation costs; and outcome-based risk sharing. Nomura explicitly states that "gains from market expansion will come with a lag." The brokerage projects revenue growth to accelerate from 1.8% in FY25 to 4.5% by FY27, indicating that market expansion benefits will begin materializing after the 12-18 month transition period when organizations move beyond proof-of-concept to full-scale AI deployment.
Reflecting these near-term challenges, Nomura has lowered target multiples for IT stocks. In October 2025, the brokerage lowered target multiples by 10% for large-cap companies due to expectations that macroeconomic uncertainty would persist, trimming target prices by 1-10% for most large-cap IT firms. While specific documentation of a Tech Mahindra downgrade from 'Buy' to 'Neutral' in July 2026 isn't available, Nomura's broader concerns about the sector—exposure to challenging verticals like Auto and manufacturing, margin recovery risks in a deflationary environment, and slower adaptation to AI-led services compared to peers—provide context for potential downgrades. The revenue growth reductions of 100-200 bps for FY27-28 impact valuation models by lowering EPS projections, reducing terminal growth rates, increasing discount rates due to risk premiums, and causing P/E ratio compression.
Nomura outlines three valuation scenarios for the sector. In a structural decline scenario, revenue growth could slow to 2-3% with 6-7% deflation, pushing valuations to 10-12x earnings. In a data/AI-led pivot scenario (base case), growth reverts to long-term averages, supporting P/E multiples in the early 20s. In a transformative AI orchestration scenario (bull case), multiples could move above the early 20s driven by non-linear revenue and margin expansion. For sector multiples to rise, conditions include macro stabilization, evidence of AI monetization, deal acceleration, and margin stabilization. Despite near-term headwinds, Nomura maintains confidence in large caps like Infosys and Cognizant, noting that valuations have corrected meaningfully and are now below 12-year averages, trading at a 12-39% discount to five-year averages.
This outperformance is driven by structural advantages. Companies like Coforge are recognized as "Major Players in Gen AI Operational Transformation" and "Disruptors in Gen AI services," offering domain depth, engineering rigor, and outcome-aligned commercial models. eClerx combines 25+ years of domain knowledge with AI embedding directly into operational workflows, delivering "measurable outcomes at scale." General midcap advantages include agility and speed, niche specialization, lower legacy burden, entrepreneurial culture, and closer client relationships. Nomura projects midcaps to continue outgrowing larger peers, with FY27 EBIT margins expected to expand by 50 bps for mid-caps compared to 30 bps for large caps.
The guidance outlook highlights a clear hierarchy of business resilience.
Infosys is maintaining 1-3% constant currency growth guidance with stable 20-22% EBIT margin band, while HCL Tech is expected to retain 3-5% revenue growth guidance with unchanged 17-18% EBIT margin band. This stability indicates resilience through diversified client bases, strong balance sheets, and proven ability to navigate technology cycles. In contrast, Wipro is expected to guide -1% to +1% revenue growth in Q2 FY27, reflecting ongoing transformation challenges, higher exposure to discretionary spending cuts, and competitive pressures affecting pricing power.
Midcaps are outperforming large caps due to competitive dynamics in the current spending environment. Clients are seeking specialized skills for critical AI and digital transformation projects, favoring midcaps' niche expertise. Midcaps are moving faster from AI pilots to production-grade outcomes, are more willing to adopt outcome-based pricing models, and benefit from flexible engagement models with lower minimum requirements. Large caps face challenges from scale inertia, legacy contract burdens, and a generalist perception. Nomura believes this midcap advantage is structural rather than cyclical, supported by AI capabilities and specialization. While risks exist—including large cap response, market consolidation, and valuation concerns—Nomura remains constructive on midcap sustainability through FY27, advocating for stock selection within midcaps rather than broad exposure.
