Should investors buy TCS, Infosys ahead of Q4 results or is AI risk too big to ignore?

Indian IT stocks are under pressure heading into the March quarter earnings season, with the Nifty IT index down nearly 20% this year. The key question for investors is whether the correction offers a buying opportunity ahead of results or if demand and structural concerns around artificial intelligence (AI) are still too big to ignore.

Brokerages and analysts remain cautious on the near-term outlook, pointing to weak global demand and limited discretionary spending by consumers. Expectations for Q4 remain subdued, with modest revenue and weak deal performance likely as companies face demand-side tensions, said Master Capital Services’ Ravi Singh.

Emkay also expects muted growth in Q4 for IT services companies, driven by fewer business days and continued caution among customers. Growth is likely to be uneven across sectors, with BFSI holding up relatively well while recovery in verticals like healthcare, manufacturing, retail and hi-tech is patchy.

Sequential income growth is expected to remain weak across the sector. ICICI Securities estimates constant currency revenue growth in the range of -0.3% to 3.2% for Q4, indicating that most companies are likely to report flat or marginal growth. Jefferies also expects overall revenue to be largely flat quarter-on-quarter, reinforcing the view that demand has not picked up meaningfully.

Pressure is not limited to growth. Margins are expected to be mixed, impacted by wage increases, restructuring costs and deal ramp-ups. However, the sharp depreciation in the rupee has opened up some opportunities. MK noted that currency tailwinds could help offset some of the pressures from macro uncertainty and evolving cost structures.

Beyond the near-term slowdown, AI has emerged as a key structural factor shaping investor sentiment. “Concerns around generative AI have played a major role in the sector’s underperformance in recent months, along with geopolitical risks such as the Middle East crisis,” said JM Financial, another broker.

AI presents two different scenarios

AI presents a complicated picture for IT services companies. On the one hand, it is expected to increase productivity and create new opportunities in automation, cloud and digital transformation. On the other hand, it raises concerns around pricing pressures and potential deflation in IT budgets.

ICICI Securities noted that AI-led productivity gains are front-loaded and could weigh on margins if companies are unable to fully capture value over the lifetime of the contract. “However fears of AI-led deflation may be overblown in the immediate term. We expect such pressures are unlikely to intensify in FY27, supported by stable client budgets and a healthy pipeline of large deals.”

These comments suggest that while AI is a concern, it may not yet translate into severe earnings disruption.

Investors’ sentiment has soured

Investor sentiment has been volatile in recent months. The IT sector initially saw a recovery in January, outperforming the broader market, but quickly reversed in February and March as AI concerns and geopolitical tensions intensified.

Looking ahead, the focus during earnings season will be on FY27 guidance, rather than Q4 numbers alone. Jefferies expects IT majors such as Infosys and HCL Tech to guide for modest growth in the range of 2-6% year-on-year, suggesting the recovery is likely to be gradual rather than sharp.

To view the evaluation key metric

Valuation also remains a factor. JM Financial pointed out that the sector is currently trading at around 18 times FY27 earnings and a re-rating is unlikely unless concerns ease AI and growth visibility.

Given this background, most analysts do not recommend aggressive buying at current levels. Ravi Singh said investors should be cautious and focus on companies that are actively adapting their business models to integrate AI.

Brokerages are also becoming selective. Emkay upgraded Coforge and eClerx, while JM Financial picked up Infosys in large caps and Mphasis in the mid-tier space. The broader takeaway is that while a sharp correction in IT stocks has improved valuations, the near-term outlook remains uncertain. Weak demand, cautious client spending and evolving AI dynamics weigh on sentiment.

(disclaimer: Recommendations, suggestions, opinions and views given by experts are their own. (These do not represent the views of The Economic Times)