JM Financial’s Rajiv Berlia warns that IT margins could shrink in FY28 if the rupee fails to strengthen again. The NSE IT Index, however, has already slipped 12% YTD as the rupee weakened 7%, a move that has temporarily lifted margins by roughly 100 basis points.
A 1‑percentage‑point drop in the rupee typically adds 15 to 20 basis points to gross margins. Berlia noted, "A 1% depreciation translates to 15‑20 bps margin gain," underscoring how currency swings have been a key cushion for the sector.
Despite the sector’s underperformance, Berlia keeps buy/add ratings on nine of the 15 companies he covers, zeroing in on mid‑tier names like Sagility and Mphasis. Sagility trades at about 15‑16× forward earnings, while Mphasis shows improving YoY growth that could narrow valuation gaps with peers such as Persistent Systems.
The analyst also flagged client demand for AI‑driven productivity gains. Tech Mahindra, Infosys and HCLTech have flagged this dynamic, with some large deals committing to 70‑80% efficiency improvements. These discounts are deal‑specific, but they illustrate how vendors are willing to pass on cost‑cutting benefits to win business.
If the rupee does not depreciate further, the margin cushion that has been feeding IT firms this year may erode. Investors should monitor FY28 earnings for early signs of margin compression amid rising AI‑led cost‑cutting and competitive intensity.