What lies ahead for Indian IT as brokerages reevaluate growth prospects?

Nomura

Uncertainty overdone: The brokerage said the disruption concerns oversimplify the role of IT services companies. “It is easier said than done that a SaaS product and IT vendors can be replaced by vibecoded apps, given that the enterprise IT buyers optimise for reducing risks of failures and not costs and innovations necessarily,” said Nomura’s analysts. “Tech adoption for newer and unproven technologies remains slow given concerns about compliance, regulatory, business and continuity risks.”

What should investors do: “The current sell-off in IT services stocks appears to be a case of front-loading of pains – pricing in extinction of old business models before gains from new business models emerge,” said Nomura’s analysts. “Transition period is painful, but high free cash flow and dividend yields (4-5%) will likely create a floor for stocks sooner than later.”

The brokerage said valuations are now trading below the last 12-year averages and at a 12-39% discount to last 5-year averages. Its top picks are Infosys, Coforge and eClerx.

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UBS
Terminal Value: The IT stocks sell-off has brought terminal value – the long-term cash-flow assumptions that drive a large part of valuations – into focus as investors are concerned over long-term earnings prospects and growth trajectory of these companies.

“Overall, while we believe there has been some near-term overreaction in our view, the questions around terminal growth cannot be ignored,” said UBS’s analysts. “Companies that accelerate the shift towards non-linearity, invest in IP/platforms, and help clients bridge the AI adoption gap will be the ones to defend terminal value.” Adaptability remains key: The brokerage said it will keep a close eye on how quickly and effectively the IT services companies adapt to pricing model changes, headcount and acquisitions in response to the structural changes.

“The prevailing tone in the market seems to presume a rapid, broad-based automation of enterprise workflows by agentic AI, rendering the traditional IT services model structurally weak,” said UBS’s analysts. “In our view, this isn’t an unfair assumption, but what we believe is that we will see a model transition from linear staffing to solutions and platforms, to outcomes and to problem solving.”