The Indian IT sector valuations have turned attractive after what appears to be an over-reaction to the artificial intelligence (AI) threat, according to Seshadri Sen, Head of Research and Strategist at Emkay Global Financial Services Ltd. Sen said that while structural growth challenges remain, the market’s most pessimistic projections of a deep, prolonged contraction are overstated.
Emkay expects long-term sector growth to remain at sub-5%, but sees little merit in the “alarmist” projections of a vicious contraction. It says value is emerging at 14–18x price-to-earnings and a 4–6% free cash flow yield. The brokerage firm sees potential of a 6.5%-18.3% return, with limited downside, and has turned marginally overweight on the sector.
What the market may be missing
A key argument in the Emkay report is the “Jevons effect” — the idea that efficiency gains lower costs and ultimately expands overall demand. While AI could compress individual contract values, new use-cases and broader adoption may expand the overall technology spending pie over time. IT services firms may lose some wallet share to the AI ecosystem, but potentially on a larger base.
Sen also argues that margin gains from AI-led efficiencies are unlikely to be fully passed on to clients, especially as outcome-based pricing models gain traction. Importantly, generative AI is still some distance away from being enterprise-ready at scale and may not be universally applicable across industries.
He noted that the Indian IT companies remain relevant in customizing, integrating and implementing AI-based solutions. There is also no visible impact yet on hiring or growth trends. The global capability centre (GCC) and insourcing threat is expected to persist broadly along recent lines rather than accelerate sharply.
Emkay’s base case sees the sector settling at 0–3% long-term EBIT growth in dollar terms, with upside if companies adapt swiftly — something they have demonstrated historically. The feared “destruction before recovery” phase may also be mitigated if near-term revenue tailwinds from legacy modernization and AI transformation projects materialize.
Macro risks and broader implications
The report flags that an ultra-bearish IT scenario could have second-order effects on India’s macro fundamentals. IT exports account for a multiple of the current account deficit in 1HFY26, while the sector contributes meaningfully to wages among the top listed companies, with implications for consumption and retail lending.
However, Emkay views this worst-case scenario as remote. It expects tech hiring, including in GCCs, to grow modestly at 0–3%. Over the longer term, consumer AI adoption could replicate the macro benefits seen during the mobile revolution, reshaping SMEs and creating new demand pools.
Model Portfolio Changes
In its model portfolio, Emkay Global has added Indus Towers, SRF, Infosys, and HCL Technologies, while exiting Sun Pharmaceutical Industries, Gravita India and Mphasis. It has trimmed its positions in Maruti Suzuki India, Larsen & Toubro (L&T), and Craftsman Automation.
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