“It is certainly disappointing, although not unexpected. Outlook for the sector, if you compare it to say a year back, what people were looking for, FY26 (2025-26) is clearly a step down in expectations,” Shah said, pointing to a weaker demand environment.
For investors, the takeaway is clear. “It is a tough space to be an investor, and in a portfolio, I would suggest very low allocation, if any,” he said.
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Even large-cap IT names may not offer enough upside at current levels. “If the underlying growth is maybe 3-4% including some currency benefit, then you have to get down to low teens, or 10-12 kind of multiples for them to be attractive investments,” Shah said, indicating further downside risk to valuations.
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He was clear that the sector is not done correcting. “The whole sector needs one more valuation reset. We saw a bit of a rally, but I think that rally is not going to find support,” he said, pointing to global tech layoffs and slowing demand.
While mid- and small-cap IT companies may still offer selective opportunities, growth expectations have already moderated. “Companies that were growing at 20% and now people are happy if they are saying double-digit growth,” he said.
Shah said the traditional IT services model itself is under pressure. “When the whole industry is shrinking in terms of the number of people required, then it’s not a great place to be,” he said.
Within this, he remains highly selective. Shah said his firm owns Mastek, citing confidence in its order book and management, but added, “we won’t go aggressive there either,” signalling a cautious stance even on preferred names.
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He also pointed to niche areas such as healthcare, IT and banking software, mentioning companies like IKS Health and Affle India as segments that could benefit if they adapt well to AI, though without taking aggressive positions.
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