IT stocks are recovering, but a re-rating still looks distant
Indian IT stocks have staged a partial recovery after April’s tariff-driven selloff, buoyed by Accenture’s upbeat outlook. However, sluggish deal momentum, muted discretionary spending, and steep valuations may still cloud the prospects of a sector-wide re-rating.
Indian IT services sector is the most preferred investment theme among fund managers, according to the latest Asia Fund Manager Survey by BofA Securities. In June, 21% of fund managers chose the sector as their top pick, up from 13% in May. The survey findings were followed by results from global IT major Accenture, which is widely seen as a bellwether for Indian tier-1 IT firms.
Accenture, which follows a September-August financial year, reported 7% year-on-year constant currency revenue growth in the quarter ended May (Q3FY25), beating consensus estimates and coming in at the upper end of its guidance range.
A Motilal Oswal Financial Services report dated 20 June said that the impact of a tariff-related pause was milder than earlier feared for Accenture. This, it said, was also corroborated by the rebound in Indian IT stocks over the past two months.
The Nifty IT index has rebounded to 38,408 after slumping to a 52-week low of 32,517 on 7 April, amid sharp selling triggered by the US tariff announcement on 2 April. With Indian tech firms heavily exposed to the US market, fears of a tariff-induced slowdown had spooked investors. Such a downturn could dampen deal wins and derail hopes of a revenue revival in FY26.
That said, Accenture raised the lower end of its FY25 constant currency revenue growth guidance (with one quarter remaining) to 6-7% from 5-7% earlier. While global uncertainty remains elevated compared to 2024, the Q4FY25 pipeline remains strong, Accenture management said. Clients continue to prioritize digital transformation, Gen AI (generative artificial intelligence) adoption, and enterprise-wide cost efficiency, but discretionary IT spends are still muted. Overall, the demand trends have been largely stable, it added.
“An unchanged demand environment can protect current FY26 revenue growth assumptions for Indian IT and perhaps lead to upsides for a few. One can also view the increase in organic growth guidance to 3.5-4.5%, excluding the impact on the federal business as a positive in this regard," said a Kotak Institutional Equities report dated 21 June. On the other hand, a muted deal-win scenario will create headwinds for growth in 2HFY26 and 1HFY27, it added.
Accenture’s deal bookings in both consulting and managed services (outsourcing) fell year-on-year in Q3FY25. Accenture competes with large Indian IT companies in the managed services business, where deal bookings declined for the third consecutive quarter and by a sharp 10% year-on-year in Q3FY25. Plus, the pace of revenue growth eased after twosuccessive quarters of double-digit growth.
This does not bode well for Indian companies given that recent deal wins trends bring little cheer.
According to BNP Paribas Securities India, deal-win announcements in May were tad lower month-on-month after a decline in April. Tata Consultancy Services Ltd and Infosys led the deal wins in May with four deals each followed by Wipro Ltd. But BNP cautions that ongoing global macroeconomic uncertainty will keep deal momentum slow in coming months.
“The three-month rolling sum of deal signings, a strong one-quarter lead indicator of deal total contract value, declined further," it said in a report on 4 June.
Despite the recent rebound,the Nifty IT index is down 11% in 2025 so far. Accenture’s Q3FY25 had some positives, but it is best not to extrapolate them for Indian IT stocks where valuations are a sore spot too. The Nifty IT index trades at a one-year forward price-to-earnings multiple of 26x, premium to its long-term average of 21x, as per Bloomberg data.
A re-rating for the sector depends on a new technology cycle emerging, client spends moving from ‘run-the-business’ spends to ‘change-the-business’ spends and meaningful earning upgrades, added Motilal Oswal report.
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