Brokerage firm Motilal Oswal believes that the Banking and Financial Services (BFSI) segment may turn out to be a drag on the revenue of Indian IT firms during the next financial year.

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The BFSI segment contributes to nearly 30 percent of the revenue of Indian IT companies and has been a major growth driver for the industry.

Motilal Oswal believes that the issues in the US banking system implies adverse near-term impact for IT spends. "This would hit IT spends in the early part of FY24 and exert further pressure on near-term growth outlook for IT services," the firm said in a note.

However, the brokerage said that while the current macro environment remains weak, the structural demand outlook for the sector remains intact. "We continue to believe that the macro challenges will ebb by H1FY24 and the situation will start improving in the later part of the year," the note said.

Motilal Oswal also said that valuations have corrected significantly from their peaks and concerns on macro environment have already been factored into the valuations.

The brokerage also mentioned that tier-I companies are better placed in a weakening demand environment compared to tier-II players due to their scale of offerings, top-notch client profile and execution prowess.

"With structural demand remaining intact, we expect a healthy recovery in financial year 2025," the firm said.

TCS is the top pick for Motilal Oswal among tier-I IT companies, followed by HCLTech, and Infosys. The brokerage has also cut its current and next financial year for tier-I players by 0.4-3.9 percent and 0.8-3.7 percent due to their near-term weakness.

Motilal Oswal estimates indicate that the recovery in growth from the second half of the current financial year and a 100 basis points improvement over financial year 2023-2025 should drive the industry's earnings growth.

"While we are still assessing the impact of weakness in the BFSI space for tier-2 names, we are cutting our estimates for tier-1 companies due to the weakness in BFSI space and based on our discussion with the managements," the firm wrote in its note.

Here's Motilal Oswal's latest assessment of Indian IT companies:

(Edited by : Rukmani Krishna)