Indian IT Faces Headwinds: Kotak Cuts Estimates Amid AI Deflation & Macro Woes!
Indian IT Faces Headwinds: Kotak Cuts Estimates Amid AI Deflation & Macro Woes!
Kotak slashes revenue and fair value targets for top Indian IT firms like TCS, Infosys, and Wipro for FY27-29. Discover how GenAI deflation and global crises are impacting the sector, even as some stocks rebound! #Indian
Indian IT giants are bracing for a challenging June quarter, as Kotak Institutional Equities has significantly trimmed its revenue and fair value estimates for fiscal years 2027-29. The brokerage firm points to a combination of factors, including the ongoing West Asia crisis and the emerging trend of GenAI-led deflation, which is starting to impact managed services contracts.
Kotak anticipates weak revenue growth for most incumbent Indian IT companies, ranging from -1% to +1% in the first quarter of FY27. This subdued outlook comes despite the quarter typically benefiting from additional billing days. Specifically, HCLTech's services growth could be around -1%, and Wipro's at -1.1%. Tata Consultancy Services (TCS) is expected to report flat revenue, while Infosys might see a modest 1% organic quarter-on-quarter growth, which Kotak describes as "underwhelming." Tech Mahindra is projected to also grow by 1% quarter-on-quarter.
A key concern highlighted by Kotak is the increasing pressure from AI deflation. As frontier model capabilities advance rapidly, they are forcing companies to make additional assumptions about reduced costs and increased productivity, potentially leading to lower revenue for service providers. This, coupled with the marginal direct and indirect effects of the West Asia crisis, is shaping the cautious outlook.
Despite these revised estimates, Kotak suggests that challengers in the IT space are likely to continue outperforming incumbents. Among the incumbents, TCS remains Kotak's preferred pick, while Coforge, Hexaware, and Indegene are favored among the challengers. EBIT margins are largely expected to remain stable across most companies, with TCS being an exception due to recent wage increases. The depreciation of the Indian Rupee against the dollar (down 2.6% quarter-on-quarter) is providing some cushion against pricing pressures.
In a contrasting development, Indian IT stocks recently experienced a rebound. The Nifty IT index climbed over 4.7% on Thursday, leading gains on the NSE. This recovery followed earlier losses and was partly fueled by a rally in US tech stocks and a renewed interest in Indian IT companies due to what analysts perceive as attractive valuations after a notable correction. Firms like Infosys and TCS saw significant jumps, alongside strong buying in mid-cap IT stocks. Nuvama, another prominent brokerage, maintains a positive outlook on IT stocks, listing Coforge, Mphasis, Hexaware, Infosys, and TCS among its top picks, suggesting a mixed sentiment across the analyst community.
This dynamic environment highlights the complex challenges and opportunities facing the Indian IT sector, as it navigates global economic headwinds and the transformative impact of artificial intelligence.
