Edited excerpts from a chat:
Given that most IT majors have given weaker than expected guidance for FY27, how has your outlook on IT stocks changed after the Q4 results?
FY27 guidance indicates revenue growth will remain at the modest level recorded in FY26, which we regard as disappointing. The shortfall reflects client‑specific challenges rather than any incremental sector‑wide weakness. That said, client spending, which began to improve early in the year, appears to have stalled because of the Middle‑East conflict and its likely macro‑economic repercussions.
What signs are you reading from the management commentary around the impact of AI on tech spending and order books?
We see a wide growth divergence that is starting to emerge among the companies who are getting disrupted from AI and those who are better positioned in this transition. Although investors fear incremental pricing pressure on IT‑services firms, most companies noted no new price compression or delay in large deals signing since the launch of the latest frontier‑model versions and plugins in January. The sector’s pricing pressure stems chiefly from aggressive vendor‑consolidation pricing, not from AI itself, and the order book does not fully capture the revenue leakage caused by such consolidation.
You argued in your report last month that the risk-reward balance is turning favourable even in the most bearish scenario. We have noticed that pace of selling has been on a decreasing trend after the February sell-off in which the IT index fell nearly 20%. Do you think we are on a recovery path in FY27?
If the Middle‑East conflict de‑escalates soon, we expect the improving macro‑economic backdrop to lift growth at IT‑services firms. Nevertheless, we expect revenue‑growth recovery to be gradual over the next few quarters, as AI’s deflationary effect continues while demand from a healthier macro environment and AI‑related services takes longer to materialise. We therefore recommend a selective approach, favouring companies less exposed to AI disruption and those poised to benefit from AI adoption.
While there is hardly any doubt that AI means a structural shift on how we look at technology, what makes you think that it won’t be a structural breakdown in Indian IT services model?
We are convinced that AI will not upend the Indian IT‑services companies’ business model: for three key reasons:
a) Enterprises are unlikely to surrender pricing power and technology ownership by consolidating their entire tech stack with a handful of frontier‑model providers.
b) Frontier‑model firms lack the capacity to support and customise solutions for thousands of enterprise clients, and
c) A core value proposition of IT‑services firms is their assumption of implementation and management risk; this role remains essential regardless of whether applications originate from software/SaaS vendors or frontier‑model providers.
Is it time for long-term investors to start thinking of large-cap IT stocks as value stocks?
We consider it risky to label any large‑cap IT stock as a “value” investment while disruption persists and earnings‑growth risk remains elevated. Large‑cap IT firms possess diverse capabilities, and AI will affect them unevenly. Some large‑cap services exhibit an unfavourable revenue mix, making them unattractive despite an appealing dividend yield.
Do you think that buybacks and dividends will restrict the downfall in case market sentiment turns more bitter?
For companies that possess strong AI capabilities but are struggling with modest near‑term growth, buybacks and dividends act as effective downside buffers. Robust free‑cash‑flow generation and high payout ratios enable these firms to sustain a strong total‑shareholder‑return profile even in a more adverse market environment.
