Whalesbook
IT Firms Land More Deals Amid Market Sell-off
February saw a surge in global IT services deal signings, reaching a five-month high. This increase in new business came as the broader Indian IT sector faced steep stock price drops. Firms like Coforge and LTIMindtree each secured two contracts, making them Indian leaders for the month, following US-based Cognizant's lead with three deals. This strong contract acquisition, particularly in AI-driven solutions and partnerships, contrasts sharply with the market's negative reaction. The Nifty IT index has fallen 15.84% in the past month and is down 20.7% year-to-date.
AI Partnerships Fuel Sector Growth
The drive for AI integration in enterprise solutions saw significant growth in AI partnerships among global IT services firms during February. Companies are working with major tech players like Google Cloud, Microsoft, and OpenAI to expand AI capabilities and speed up AI-driven changes. Cognizant partnered with Google Cloud, Palantir, and Uniphore, while Capgemini partnered with OpenAI, Microsoft, and Google Cloud. Indian IT giants also formed AI partnerships: TCS partnered with Honeywell, AMD, GitLab, and ServiceNow; Infosys partnered with Anthropic for AI solutions in regulated industries; and HCLTech introduced an AI contact centre solution with Cisco and its VisionX 2.0 platform with Nvidia. Coforge added new AI capabilities to its CodeInsightAI platform. This focus on AI collaboration shows the sector's strategic direction, aiming to use generative AI for automation and innovation.
Deals vs. Stocks: The AI Valuation Puzzle
Despite the strong inflow of deals and robust AI partnerships, Indian IT stock valuations have fallen. Coforge shares plunged 26.5%, Infosys declined 13.69%, TCS dropped 16.15%, and HCLTech fell 13.57% in the past month. This sharp decline stems from investor worries that AI could automate jobs, threatening traditional revenue models and long-term growth. Analysts project AI could cause a 14-16% drop in IT services pricing and revenue per employee. While deal signings are at a five-month high, the fear of AI disruption is outweighing current business wins, causing IT stock valuations to drop significantly. For instance, Infosys trades at a P/E of about 19.03, HCLTech at 21.4 (or 20.6), TCS at 19.07 (or 19.40), Coforge at 29.86 (or 30.6), and LTIMindtree at 27.10 (or 27.3). These valuations are near their five-year lows or median P/E ratios.
Why Investors Are Worried: AI Disruption and Valuations
A key concern is how AI might reduce the need for human workers, impacting revenue per employee and project costs. Some analysts estimate this could cut earnings per share by up to 10% for large firms, with deflationary impacts on traditional IT services ranging from 20-50% if AI adoption is rapid. Global economic uncertainty and geopolitical tensions are also hurting client IT spending. Foreign institutional investors sold approximately $8.5 billion in Indian IT stocks in 2025, signaling broad caution. Compared to global peers like Cognizant (P/E around 14.12) and Capgemini (P/E 11.6x to 15.12x), most Indian IT firms appear more expensive. This valuation premium, such as Coforge's P/E of nearly 30, may not be sustainable if revenue growth slows due to AI's impact. Infosys's 3.5% year-over-year revenue drop last quarter and falling operating margins also point to business challenges.
What's Next: Guidance and AI Clarity
Upcoming guidance from major IT players like Infosys and HCLTech for FY27 will be key for investor sentiment. HSBC expects companies to offer more grounded guidance, moving away from optimistic 'beat-and-raise' forecasts, which could signal management's confidence in handling changes. While strong US corporate earnings offer a positive macro backdrop, uncertainty about AI adoption and its true impact on services might cause clients to pause spending. The sector must show practical AI uses beyond testing and offer clear plans for adapting business models to regain investor trust and justify current valuations. Most analysts rate these stocks 'Hold', with some recommending 'Buy' for LTIMindtree, but overall caution prevails.