Worst over for IT stocks? Experts analyse Q2 results of TCS, HCL, Tech Mahindra and others, suggest top picks

IT stocks have been on a roll over the last few sessions boosted by better-than-expected Q2 results and selloff in AI stocks globally as investors shift their focus from hype to financial performance and structural outlook. The Nifty IT index surged 3.92% on Friday, 16 October, extending gains for the fourth consecutive session. In just four sessions, the index has jumped nearly 13%.IT stocks are rising after a prolonged period of stress due to macroeconomic challenges, cautious discretionary spending by clients, and AI-led disruptions.The sector remains at a crucial juncture as experts believes, the next leg of growth will depend on translating deal wins into revenue and scaling AI-led services sufficiently to offset productivity-driven deflation in traditional engagements.Is the worst over for IT stocks?The Q2 numbers of several IT players, including TCS and HCL Tech came better-than-expected.Sumit Pokharna, SVP- Fundamental Research at Kotak Neo, said the demand environment has not materially changed since the last quarter.

Discretionary programs without near-term value remain under scrutiny. AI revenue grew faster in BFSI relative to other verticals."Enterprises are investing in (1) AI native business solutions, (2) core modernization with the help of AI, (3) autonomous GBS in horizontal functions such as finance, HR and procurement, (4) modernizing legacy data estate and (5) data foundations. Cybersecurity, AI governance, AI guardrails, tokenomics, orchestration, access controls, security observability, etc. are becoming important for clients, creating a significant and growing opportunity," said Pokharna.AI capabilities continue to improve across the spectrum of skills and tasks.

There has been meaningful progress in capabilities in software engineering tasks in the past 6-9 months when measured on performance of AI models on benchmarks. Older benchmarks for software engineering tasks have been saturated. There has been healthy progress in newer more stricter evaluation benchmarks.Kunal Bajaj, a research analyst at Choice Institutional Equities, believes the IT services sector is nearing stabilisation, although a broad-based recovery remains contingent on stronger revenue conversion and a revival in discretionary spending.Bajaj underscored that Q2FY27 performance of major IT companies showed divergent execution.

For example, TCS delivered 0.5% QoQ CC growth, while HCL Tech’s record $3.3 billion bookings and 131 bps QoQ margin expansion reflected stronger operating momentum. In contrast, Wipro’s IT services revenue declined marginally by 0.1% QoQ, while total bookings fell 22.9% QoQ in CC terms, highlighting the uneven pace of recovery, said Bajaj.Bajaj believes companies with stronger pipelines, diversified growth drivers and consistent margin execution are better positioned to outperform.

"Within our coverage, we prefer tier II IT companies based on better execution, agile nature and market share gain. Within tier I companies HCL Tech and Tech Mahindra offer relatively stronger operating momentum, while TCS remains positioned to benefit from its scale in AI-led transformation," said Bajaj. "We would look for sustained organic growth acceleration, improved large-deal conversion and tangible AI monetisation to confirm that the sector has moved beyond stabilisation into a durable recovery.

Until then, the outlook favours selective stock-specific opportunities over a broad-based sector re-rating," said Bajaj. IT stocks to buy Pokharna is positive on Tech Mahindra, Infosys, TCS, Persistent, and Coforge. Bajaj has a positive view on Tech Mahindra in large cap space and Coforge, Mphasis and Zensar Tech in mid and small-cap space. Kuber Chauhan, a research analyst for IT sector at Axis Direct, said a sustainable sector recovery requires evidence that earnings estimates have stopped falling and that revenue growth is improving.

Therefore, recovery in stock price alone is not the proof that the worst is over. Chauhan prefers mid caps like Coforge and Persistent Systems and selective large caps such as LTM and Tech Mahindra.