AI relief fails to lift legacy IT stocks as earnings worries weigh
The Indian IT sector has seen a rollercoaster of activity, where mid-sized companies have outperformed their larger peers recently. Increased deal bookings are promising, yet slow revenue growth due to client indecision lingers. The emergence of AI technology brings both new possibilities and pricing pressures for classic services. To sustain their margins in this shifting landscape, companies…
Mumbai experienced a mixed performance for Indian IT stocks in November, as the Nifty IT index showed signs of losing momentum following a significant surge of over 17% in October. Despite a surge in foreign investments propelling the Sensex and Nifty to climb more than 10% before Diwali, legacy IT stocks faced a decline of nearly 2% this November, casting doubt on whether earnings concerns at outsourcing firms would persistently keep prices and valuation multiples restrained.
The decline follows substantial drops in AI-heavy bets across Asia, with the Kospi in South Korea dropping around 20%, the Taiwan stock index falling 13%, Japan's Nikkei declining 10%, and the Nasdaq Composite losing 6%. Similar declines were observed in the Shanghai Composite (-4.4%) and Hang Seng (-2.4%), indicating a global correction in AI-related stocks.
September-quarter earnings for Indian IT companies presented an uneven recovery, with mid-tier players outperforming larger peers, while underlying demand conditions remained largely unchanged. Choice Institutional Equities reported an average sequential revenue growth of around 5.4% for tier-2 players versus almost 1.1% for tier-1 companies.
Notable growth was seen in companies like Coforge (10.9%), Persistent Systems (7.8%), Tech Mahindra, and HCLTech. However, even with healthy deal bookings, revenue growth hasn't matched expectations due to phased transitions, staggered project ramp-ups, and extended client decision-making cycles.
A significant concern for the sector lies in the changing economics of technology services as clients increasingly employ AI to boost productivity and cut costs. While AI creates new business opportunities, these gains haven't fully offset pricing pressures in traditional services. Gross deflation is estimated at around 7% and net deflation at 3.5% for companies as clients seek greater productivity savings through contract renewals.
Sandeep Gogia, MD and co-head of Equirus Capital, sees potential in AI-related investments, despite safety, security, and token-cost optimization concerns. Integration of systems of records and data systems with systems of intelligence and AI models offers opportunities in data engineering, application modernisation, cloud migration, and cybersecurity as enterprises transition towards large-scale AI implementation.
Profitability remains mixed, with operational efficiency and cost discipline partially offsetting wage and delivery-related pressures. However, margin performance remains uneven, with margins at large IT companies expected to remain stable due to rupee depreciation but facing potential challenges from pricing pressure and AI-related investments. Equirus Capital forecasts Infosys to lower its FY27 revenue growth guidance to 1.5-2.5%.
Written by urgent.news from The Economic Times - Top News's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
