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AI to Squeeze IT Earnings, Nifty Eyes New Highs
23 Feb
Summary
- Nifty 50 may reach new peaks in 12-18 months.
- Indian IT firms may see earnings cut from FY28 due to AI.
- Foreign investors are showing reduced selling pressure recently.
The Nifty 50 index is anticipated to ascend to new record highs within the next 12 to 18 months. This projection is supported by current valuations being below long-term averages and a noticeable easing in foreign investor selling.
Conversely, India's information technology sector is bracing for a potential earnings downturn. Analysts foresee earnings cuts commencing around fiscal year 2027-2028. The primary driver for this concern is the anticipated impact of artificial intelligence on IT services, potentially compressing billings and moderating revenue growth.
This AI-driven compression is expected to reduce the man-hour effort required for IT projects, leading to lower revenue potential. While IT companies may see a structural de-rating in their price-to-earnings multiples, shifting from the 20-22 band to 17-20, a revival in other sectors like banking and telecom offers support.
Foreign institutional investors have experienced significant outflows over the past year, with nominal GDP growth at 9-10% offering limited dollar-term returns. However, the pace of selling is expected to slow, providing some market relief. Sectors like banking and telecom are viewed positively, with banking stocks trading below 2x price-to-book on FY28 estimates and telecom benefiting from tariff hikes.
