IT rebounds, but AI clouds large-cap outlook

Sumit Pokharna, SVP-fundamental research at Kotak Securities, said the recent outperformance largely reflects buying after the sharp correction earlier in the fiscal had priced in much of the bad news. Earnings growth, however, could remain muted in the second quarter and over the next two quarters of FY27, he said.

Kuber Chauhan, research analyst-IT at Axis Direct, said the recovery appears to have been driven by sharp valuation compression, easing fears over AI disruption and early signs of stabilisation in enterprise technology spending.

There are also some green shoots on the operating front. Ashwin V, partner for executive engagement at Everest Group, pointed to better-than-expected earnings, margin improvement following restructuring and the launch of advanced AI projects by leading companies. However, he cautioned that it was still too early to conclude that the sector had stabilised.

Clients increasingly expect AI-led productivity gains and lower costs, putting pressure on pricing and traditional revenue models. Ashwin, however, believes this could partly be offset by the sheer volume of work required as enterprises adopt and scale AI.

Even rising global bond yields and concerns that the AI trade may be overheating may not be enough to trigger a meaningful rotation into Indian IT stocks.

Pokharna expects the "AI deflation" story for Indian IT to persist in the near term. While the survival of large IT services companies is not in question, he believes they could take longer to rework their business models for an AI-led environment. Further meaningful corrections from current levels, therefore, cannot be ruled out.

Chauhan said higher bond yields could raise the cost of capital and make hyperscalers more selective about AI capital expenditure. However, he does not expect a sharp slowdown in AI spending yet, given the high priority technology companies continue to accord it.

Interestingly, analysts are more constructive on select mid-cap IT companies, which they believe could adapt faster to the AI transition and benefit from their specialised capabilities.

"Some of the mid-cap IT companies, like Coforge, are providing niche skills with strong execution and management focus to their clients," Pokharna said. Given the wide differences in companies' ability to navigate the AI transition, he favours a selective rather than sector-wide investment approach.

Chauhan expects a gradual and selective recovery in Indian IT over the near to medium term, led by companies with stronger deal wins and greater exposure to AI, cloud, data and engineering services.

Ashwin sees specialised providers such as Persistent and Coforge benefiting by playing to their strengths. Mid-tier companies attempting to offer everything to every client, however, could find the transition more challenging.

For investors, the rebound may therefore be less a signal of a broad-based IT comeback and more the beginning of a sharper divide between companies that can successfully reinvent themselves for the AI era and those that struggle to adapt.