Indian IT Stocks: AI Disruption Presents Long-Term Opportunities | Expert View

Indian IT stocks, recently buffeted by investor anxieties surrounding the potential impact of artificial intelligence, may be presenting a buying opportunity, according to industry analyst Piyush Pandey of Centrum India. Despite a $50 billion market capitalization decline in February, Pandey believes current valuations are “extremely comfortable” and that fears of widespread disruption are overblown.

Pandey, Senior Vice President, Institutional Equity Research at Centrum, argues that the market’s reaction has created an oversold situation, with many stocks trading below their five-year averages. He anticipates a rebound, suggesting that FY27 performance will likely surpass that of FY26, driven by productivity gains and a shift towards outcome-based project billing.

AI: Productivity Boost, Not Existential Threat

The concerns center on the potential for AI to reduce the demand for traditional IT services, particularly those reliant on large workforces. However, Pandey views AI primarily as a catalyst for improved productivity rather than a wholesale replacement of human labor. He predicts increased revenue per employee, more measured headcount growth, and the automation of routine tasks. “Even with this disruption, it is more about improvement in productivity,” he stated in an interview with ET Now.

This productivity boost, he suggests, could unlock previously unviable legacy transformation projects, making them more affordable and accessible for clients. While acknowledging potential short-term disruption, Pandey remains optimistic about the long-term growth prospects of Indian IT companies.

Shifting Billing Models and Margin Dynamics

A key shift Pandey foresees is a move away from man-hour-based billing towards fixed-price or outcome-based contracts. This transition, he believes, will help protect margins even as legacy projects face potential price compression. “There would be some margin compression for legacy projects. But as IT companies move towards outcome-based billing, margins would be broadly protected,” he explained.

He contrasts this outlook with that of US technology companies, suggesting they face a greater risk of margin erosion if they fail to effectively monetize their AI investments. “There is more of a bubble case in AI for US tech companies, but for Indian companies, the opportunities are just too huge.”

Investor Strategy: Patience and Diversification

Pandey advises investors to exercise patience, suggesting a period of price stabilization – potentially lasting a month – before adding to their positions. However, he believes that current valuations offer an attractive entry point for long-term investors, particularly given the expectation of a reasonably strong fourth quarter.

His investment recommendations favor a balanced approach, advocating for a mix of large-cap and mid-cap IT names. He specifically highlights Infosys and Coforge as top picks, suggesting a 50-50 allocation between the two.

Key Metrics to Watch

As the AI-driven IT cycle unfolds, Pandey identifies several key metrics that investors should monitor. These include Total Contract Value (TCV), particularly the portion attributable to AI-led deals, and the pace of growth in AI-related revenue. He notes that both TCS and Infosys have already reported approximately 5.5% to 5.8% of their revenue stemming from AI-led services, representing around $1.8 billion for TCS.

He also emphasizes the continued importance of tracking headcount addition to ensure companies maintain a healthy employee pyramid, balancing automation with the need for skilled personnel.

Valuations Amid Broader Market Trends

The current discussion around Indian IT stocks occurs against a backdrop of generally high valuations across global markets. S Naren, ED and CIO at ICICI Prudential AMC, recently cautioned that attractive valuations alone are insufficient to shield investors from the risks associated with AI disruption, emphasizing the need for clarity on long-term growth prospects. He suggested that opportunities are more likely to arise from investor impatience and short-term disappointments.

However, Pandey’s assessment suggests that the recent sell-off in Indian IT stocks may have already priced in a significant portion of the AI-related risk, creating a potentially favorable risk-reward scenario for long-term investors. The key, he argues, is to focus on companies that are well-positioned to leverage AI to enhance productivity and deliver value to their clients.

The broader market context, as noted by S Naren, suggests a potential for outperformance if excesses in AI-led narratives globally begin to unwind, potentially redirecting capital towards more fundamentally sound markets like India.