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AI Threatens Indian IT: Earnings Risk Beyond 2026
18 Feb
Summary
- AI may cause a significant reshuffle in Indian IT services.
- Earnings visibility for Indian IT firms is uncertain beyond FY27.
- Current IT valuations might become a dangerous value trap.
Artificial intelligence is poised to fundamentally alter the Indian IT services landscape, potentially creating new industry leaders and laggards. This disruption is seen as a structural shift, akin to the impact of offshore delivery models on the global IT sector.
Analyst Girish Pai of BOB Capital Markets expresses concern over the unpredictable trajectory of earnings and cash flows as AI integration deepens. While near-term performance may remain stable, visibility beyond fiscal year 2027 is notably unclear.
Significant challenges include the 'deployment gap,' where enterprise-wide AI implementation lags behind task-level gains, and the potential for labor displacement. Despite IT companies trading near historical valuation averages, Pai cautions against complacency, highlighting the risk of a value trap if AI-driven deflationary pressures intensify.
Pai maintains an underweight recommendation for the IT sector, with hold ratings on major players like Infosys and TCS, citing limited medium-term earnings visibility.
Only Firstsource currently holds a buy rating, offering a more favorable risk-reward profile amidst the broader sector uncertainty.
