Infosys, HCLTech Slide After CLSA Flags Weak Q3 Outlook

Shares of Infosys and HCLTech experienced a decline of approximately 2% in early trading today, following a cautious note from brokerage firm CLSA. The brokerage advised investors to reduce their exposure to Indian IT stocks, citing valuation concerns after a recent rally in the sector.

CLSA's analysis comes ahead of the Q3 FY26 earnings season for Indian IT companies. The brokerage expects largely soft Q3 results. While the Nifty IT index has significantly outperformed the broader Nifty in the current quarter, CLSA suggests that valuations are now closer to fair levels.

CLSA Downgrades HCLTech, Prefers Infosys

In its sector review, CLSA downgraded HCLTech from "outperform" to "hold," citing valuation concerns. The brokerage believes HCLTech is trading at a premium compared to peers like TCS and Infosys. While CLSA raised the target price for HCLTech marginally to ₹1,692 from ₹1,660, this represents limited upside.

Despite the overall cautious stance, CLSA indicated a preference for Infosys among large-cap IT stocks. CLSA maintained an "Outperform" rating for Infosys and increased the target price to Rs 1,814. CLSA believes Infosys is best placed to capitalize on a potential revival in US discretionary demand.

Q3 Expectations and Growth Drivers

Analysts anticipate that the top 10 IT services companies will report sequential revenue growth below 4% for the third consecutive quarter. This tepid outlook is attributed to macroeconomic uncertainty and geopolitical tensions, especially in the US and Europe, leading to continued client caution.

Despite these headwinds, some firms are expected to fare better than others. ICICI Securities forecasts HCLTech to achieve revenue growth of 2.2% quarter-on-quarter in constant currency, with potential margin expansion. This resilience is partly due to HCLTech's robust software product business. Emkay Global expects HCL Technologies to narrow its revenue growth guidance to 4-4.5 per cent constant currency.

Infosys reported a 6.1% rise in revenue in its fiscal third quarter ended December 31, 2024. The company has also raised its revenue forecast for the third time this fiscal year and now forecasts revenue growth for its full fiscal year of between 4.5% and 5.0% in constant currency.

Broader IT Sector Outlook

Citi remains cautious on the Indian IT services sector, noting sluggish revenue growth. Constant currency services revenue growth for the sector in Q3 FY26 is expected to be between 0.1% and 0.8% quarter-on-quarter, indicating a slow and uneven recovery.

While some anticipate a pickup in IT spending beyond AI-related deals, the pace of recovery remains a key factor to monitor. Analysts also suggest that margin trajectories need close tracking, as the benefits from a supportive USD/INR in the second half of 2025 could face pressure going forward.