The Information and technology stocks have been in the eye of the storm. The Nifty IT Index is down 20% so far in 2026, but is the pain done? Well, Kotak Institutional Equities has cut its fair values across companies under its coverage and sees “increasing risks even as the current adoption rates align with our (Kotak Institutional Equities) expectations.”
Kotak Institutional Equities expects a weak transmission of tech spending growth to services to continue, leading to moderate industry growth in the next several years. They estimate higher Gen AI-driven revenue deflation of 3–3.5% for FY27-FY28. This is higher than their previous expectation of 2-3% deflation.
Top IT sector picks: Kotak Institutional Equities
That said, Kotak Institutional Equities highlighted that they “expect IT services to remain relevant in the long term and do not change our terminal growth assumptions.” Quality challengers can have a leg up over incumbents.”
In terms of stock-specific picks, they prefer “Infosys, TCS and Tech Mahindra among Tier 1 names, with Coforge and Hexaware among mid-tier.” The stocks are trading at around 16 times FY28 estimated earnings and offer a payout yield of about 4–5% along with a free cash flow yield of 5–6%.
It believes Tech Mahindra has the potential to consistently grow faster than the broader industry. In the mid-tier segment, Coforge and Hexaware appear attractively valued at 18 times and 17 times FY2028 estimated earnings, respectively.
Kotak Institutional Equities have upgraded the rating for Persistent Systems to ‘Reduce’ from ‘Sell.’
Kotak Institutional Equities anticipates higher deflation risk
It highlighted that “a faster pace of innovation, focus on automating software development by key AI labs, high rate of adoption by the developer community and AI-first mindset of enterprises make the upper end of the deflation range more likely.”
“We bake in higher disruption risks in the future by increasing the cost of equity assumption by 50-100 bps,” the Kotak report noted.
Tech spending may rise, but IT services unlikely to gain fully
While overall technology spending is expected to remain strong in the coming years, driven by Gen AI adoption, the brokerage believes IT services firms may not benefit proportionately.
It noted that global IT services growth has averaged around 5% over the past decade but has trailed broader technology spending in recent years. Kotak expects this trend to continue, with a larger share of spending gains flowing to frontier AI labs and hyperscalers rather than traditional services companies.
As a result, it has built in Indian IT industry growth of 4–5% annually over the next decade, broadly in line with global industry growth.
Higher risk premium, lower valuations
To reflect rising disruption risks and continued macro pressures, the brokerage has increased its cost of equity assumption by 50–100 basis points. It has, however, maintained its long-term terminal growth assumptions, saying IT services will remain relevant over time.
The downgrade in revenue growth has led to a 1–3% cut in earnings per share estimates across companies. Kotak has reduced its growth rate assumption in the high-growth phase to 5% in US dollar terms for Tier 1 IT firms, while retaining a 5% terminal growth rate in rupee terms.
Conclusion
The report by Kotak Institutional Equities highlighted that they expect industry growth across the IT sector to moderate over the next few years. However, Infosys, TCS and Tech Mahindra remain their top picks in the large cap IT space.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.