Girish Pai, Research Analyst at BOB Capital Markets, believes tier-one IT stocks are trading near long-term average valuations. He suggests a potential 10-15% stock price decline, driven by earnings pressure, could present a good entry point. Pai highlights that while FY27 might see revenue growth, sustained recovery into FY28-29 is uncertain due to AI's impact on long-term earnings. He favors BPO-focused companies like Firstsource and eClerx, expressing caution on Persistent Systems and Coforge.
Valuations and Potential Entry Points
Tier-one Indian IT stocks are currently valued close to their historical averages, according to Girish Pai, Head of Institutional Equity Research at BOB Capital Markets. He indicated that a further decline of 10% to 15% in stock prices, should earnings continue to face pressure, could signal an attractive entry opportunity for investors. "If it does happen, then probably a 10-15% lower number from a stock price perspective would be a good entry point," Pai stated.
AI's Shadow Over Growth and Earnings
The Indian IT services sector has already endured three years of subdued growth, with FY26 anticipated to be the third consecutive year. While a modest improvement of 150-200 basis points in revenue growth is projected for FY27, Pai's primary concern is the sustainability of this recovery beyond FY27, extending into FY28 and FY29. The burgeoning discussion around agent-based Artificial Intelligence has introduced significant long-term earnings uncertainty. Global packaged software companies have already experienced sharp stock price corrections despite steady earnings, a trend that could impact Indian IT firms with substantial packaged software implementation businesses. A potential delay or scaling back of enterprise software purchases by Fortune 500 companies due to AI-related uncertainties could create downstream pressure on IT services demand.
Valuation Contraction vs. Earnings Impact
Pai observed that the market is currently characterized by a contraction in valuation multiples rather than an immediate sharp decline in earnings. However, he cautioned that persistent concerns could eventually lead to earnings pressure. Investors are advised to adopt a selective approach, differentiating between IT companies. Pai expressed a preference for BPO-focused companies, naming Firstsource and eClerx as preferred investments at current levels. Conversely, he voiced caution regarding Persistent Systems due to valuation concerns and Coforge owing to potential dilution from acquisitions.
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