Largecap IT stocks as value plays? Kumar Rakesh of BNP Paribas does a reality check

As FY27 guidance falls short of expectations, BNP Paribas analyst Kumar Rakesh cautions against labeling large-cap IT as a “value play”. It highlights the expansion of growth due to AI disruption and stalling client spending amid Middle East tensions. While buybacks offer a downside buffer, Rakesh argues that higher earnings risk makes a selective approach essential for long-term investors.

Edited excerpts from the chat:

Given that most IT majors have given weaker than expected guidance for FY27, how has your view on IT stocks changed after the Q4 results?

FY27 guidance suggests that revenue growth will remain at the modest level recorded in FY26, which we view as disappointing. The shortage reflects client-specific challenges rather than any incremental sector-wide weakness. That said, client spending, which started to improve earlier in the year, appears to have stalled due to the Middle-East conflict and its potential macro-economic consequences.

What signals are you reading from management commentary about AI’s impact on tech spending and order books?

We are seeing a wide growth gap between companies that are disrupting with AI and companies that are better positioned in this transition. Although investors fear upward pressure on IT-services companies, most companies have not seen any new price contractions or delays in signing major deals since the latest frontier-model versions and plugins were launched in January. The sector’s pricing pressure stems primarily from aggressive pricing from seller-aggregation, not AI, and the order book does not fully capture the revenue leakages caused by such aggregation.

You argued in your report last month that the risk-reward balance is becoming favorable even in extreme recessions. We have noted that the selling momentum is slowing down after the February sell-off in which the IT index fell by around 20%. Do you think we are on the road to recovery in FY27?

If the Middle-East conflict subsides soon, we expect an improvement in the macro-economic backdrop to boost the growth of IT-services companies. However, we expect revenue-growth recovery to slow over the next few quarters, as the deflationary impact of AI continues while a healthy macro environment and demand for AI-related services take longer to materialize. We therefore recommend a selective approach, favoring companies less exposed to AI disruption and those poised to benefit from AI adoption.

While there is no doubt that AI will mean a structural shift in how we view technology, what do you think won’t be a structural disruption in the Indian IT services model?

We are convinced that AI will not change the business model of Indian IT-services companies for three main reasons:

a) Enterprises are unlikely to cede pricing power and technology ownership by consolidating their entire tech stack with a handful of frontier-model providers.

b) Frontier-model firms lack the ability to support and customize solutions for thousands of enterprise clients, and

c) A key value proposition of IT-services companies is their perception of implementation and management risk; This role remains essential regardless of whether applications originate from software/SaaS vendors or frontier-model providers.

Is it time for long-term investors to consider large-cap IT stocks as value stocks?

We consider it risky to label any large-cap IT stock as a “value” investment while disruption continues and earnings-growth risk remains elevated. Large-cap IT companies have different capabilities, and AI will affect them disproportionately. Some large-cap services exhibit unfavorable revenue mixes, making them unattractive despite attractive dividend yields.

Do you think buybacks and dividends will restrict the downfall if market sentiment turns sour?

For companies that have strong AI capabilities but are struggling with modest near-term growth, buybacks and dividends serve as effective downside buffers. Strong free-cash-flow generation and high payout ratios enable these companies to sustain strong total-shareholder-return profiles even in more adverse market environments.