His base case sees a downgrade to neutral in earnings estimates for the second half of the financial year 2026-27 (FY27), since that period is seasonally weaker for the sector and he does not expect any upgrade over that stretch.
The comments came as Berlia explained why he remains cautious on the sector even while holding buy or add ratings on nine of the 15 stocks he covers, a 60% share. The NSE IT index has underperformed the broader market by close to 12% so far this year, weighed down by weak growth, rising competition, and limited room for margins to expand.
Berlia said mutual funds (MFs) that are underweight the sector still want exposure to select names, which explains the buy and add calls even within a cautious overall stance. None of the larger IT companies carry a buy rating from him; the buy and add calls sit in the mid-tier and smaller-tier space.
Currency moves did most of the work in keeping margins steady this year, he said. A 1 percentage point depreciation in the rupee typically adds 15 to 20 basis points to sector margins. With the rupee down close to 7% in the current year, that works out to a benefit of roughly 100 basis points.
“If rupee would not have depreciated, the margins would have seen a kind of an impact in this sector as of now,” Berlia said. He added that part of this cushion is being passed on to clients because of pressure from artificial intelligence (AI)-driven productivity gains and rising competition, and that the effect of that pressure should fall out of the year-on-year comparison by 2026-27. The bigger question, in his view, is what happens in 2027-28 if the rupee does not move in the sector’s favor again.
Berlia also pointed to a rise in competitive intensity across the sector, tied to demand from clients for productivity gains linked to generative AI. Companies have agreed to pass on efficiency gains to clients before those gains have actually been realised, betting they can deliver them over time.
Tech Mahindra, Infosys, and HCLTech have each flagged this dynamic in recent earnings calls, according to Berlia, with some large deals seeing vendours commit to productivity gains of 70 to 80% for clients. He said these discounts are deal-specific rather than a sector-wide pattern, but the scale of some of the commitments shows how far vendors are willing to go to win business in a period of slow growth.
Berlia named Sagility and Mphasis as his preferred stocks in the mid-tier and smaller-tier space. He described Sagility’s growth outlook as low double digits, trading at roughly 15 to 16 times estimated earnings for the next year. “The combination of the growth and the valuation is what makes me like in case of Sagility,” he said.
On Mphasis, he pointed to improving year-on-year growth and said the growth gap between Mphasis and mid-tier peers such as Persistent Systems and Coforge could narrow going forward, which he expects would also narrow the valuation gap between them.
For the full interview, watch the accompanying video
Catch all the latest updates from the stock market here
