IT stocks hit decade-high 3.2% dividend yield as FIIs flee. Should you buy TCS, Infosys, Wipro before Q1 results?
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Earnings Season Could Provide Catalyst
Indian IT stocks are trading at a decade-high dividend yield of 3.2%, while foreign institutional investor (FII) holdings have crashed to 13-year lows, setting up a potential contrarian opportunity just as Q1 earnings season begins with TCS announcing results on July 10.The Nifty IT index has crashed over 10% in 2025, with TCS leading the carnage at a brutal 17% loss. HCL Tech Infosys , and Wipro have all posted double-digit declines as US economic worries and AI disruption fears hammer the sector.The dramatic reversal in investor sentiment has left largecap IT stocks trading at yields not seen since the Covid period, with individual names like TCS offering a 3.7% dividend yield, higher than its five-year peak of 3.6%. Other IT giants like Infosys (3.2%), HCL Tech (3.7%), Wipro (3.4%) and Tech Mahindra have also turned dividend darlings."The IT services sector is trading at the highest dividend yield in the last decade (outside the Covid period) and some stocks have started looking very attractive to us," BNP Paribas noted, adding that this offers "downside protection to valuation."FII holding of IT services is near a 13-year low, while DII ownership has also fallen sharply recently. Historically, such low ownership has been a catalyst for the sector's outperformance, said Kumar Rakesh of BNP Paribas, who sees the current positioning as reflecting "excessively bearish investor sentiment."Analysts are showing clear preferences as the earnings season approaches. BNP Paribas added Infosys to their top large-cap picks alongside TCS, while also liking HCL Tech. The firm downgraded LTIMindtree to Neutral after the recent run-up and remains cautious on Tech Mahindra and Mphasis, seeing "significant underperformance risk in Wipro."HSBC continues to prefer Infosys in large-tier stocks and favours "turnaround plays like LTIMindtree & Tech Mahindra. Hexaware and Mphasis are our other preferred names in mid-cap IT."Kotak Equities has listed Infosys, Tech Mahindra, Hexaware, Coforge and Indegene as key picks while expecting TCS, Wipro and ERD names to face cuts in EPS after results.Motilal Oswal's top picks in the largecap space remain HCL Tech and Tech Mahindra. 'We could turn constructive on Infosys if commentary/guidance meaningfully improves and deal wins pick up."Nomura's Abhishek Bhandari has named Infosys, Coforge and eClerx as top picks.In mid-caps, Coforge emerges as the standout favourite across multiple brokerages. Nomura expects 7% quarter-on-quarter constant currency revenue growth for the stock, while Motilal Oswal calls it their "top pick" and also likes "LTIMindtree in an improving environment."BNP Paribas has kept Persistent Systems as its preferred midcap pick, while Kotak sees Coforge leading the growth, followed by Persistent, Hexaware and Mphasis.The shift marks a fundamental change in how investors view the sector. "IT stocks (especially top-tier IT companies) are no longer five-year buy-and-hold compounding stocks; they now require a lot more active management around their cycles/volatility," HSBC analysts warned, noting that "the long-term stock return trajectory gradient will not only be lower than in the past, but stocks will also be a lot more cyclical."The timing appears crucial as Q1 results begin rolling out this week. HSBC expects large companies to report "flat to slightly positive growth (0-1% q-o-q in cc terms)" which would be "better than feared post the Liberation Day and may herald the bottoming of an earnings downward cycle."Cross-currency tailwinds are providing additional support. "A weak dollar against a basket of currencies will lead to 100-200bp of QoQ cross-currency tailwinds, aiding estimates," noted Motilal Oswal analysts, while Nomura raised USD revenue growth outlook by 50-240bp across their coverage universe to factor in these currency benefits.While analysts acknowledge ongoing challenges including tariff uncertainty and weak discretionary spending, they see signs of stabilization. "While this environment is not conducive to discretionary spending, we expect client enthusiasm to pick up, as serious GenAI projects, especially around productivity gains, start picking up," Motilal Oswal analysts said.The setup for a potential turnaround includes "a US fed rate cut cycle on the horizon, a seasonally strong 1HFY26, and improving deal win rates, especially for a few mid-tier firms," with valuations described as "palatable: not cheap, but there is room to expand if earnings and outlook spring a surprise."As Q1 results unfold this week, the combination of attractive dividend yields, historically low foreign ownership, and potential for earnings stabilization could provide the catalyst Indian IT stocks need to break out of their recent malaise.: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
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