01 - 07 - 2026

How the AI ‘Fog’ and Macro Chills Trigger a Multi-Year Valuation Reset

The Indian IT services sector, long the crown jewel of the country’s export economy, is entering its first quarter of the new fiscal year (1QFY27) with a “sombre” outlook as a confluence of geopolitical tension, high-interest rates, and the disruptive early phases of Generative AI (GenAI) dampen enterprise spending.

Once defined by double-digit growth, the industry is now grappling with what J.P. Morgan analysts describe as a “Phase 1: Deflation” adoption cycle for AI, where productivity gains for clients are cannibalizing traditional service revenues before new AI-led growth can take root.

A winter is coming

Analyst reports ahead of the July earnings season suggest a “slow start to the year” with demand recovery remaining “in flux”. Motilal Oswal notes that aggregate revenue growth for its coverage universe is expected to track below the run-rates required to meet full-year guidance.

This has led to a preemptive strike by researchers: expectations that industry leaders like Infosys and HCL Technologies (HCLT) will “walk back” the top end of their annual growth bands. The caution is echoed by Nomura, which expects “no fireworks” this quarter, highlighting that the Middle East conflict and US macro volatility continue to weigh on discretionary decision-making.

“Demand commentary is likely to stay soft,” warns Motilal Oswal, citing a cautious stance from global peer Accenture as a bellwether for the “slower decision-making” currently paralyzing the sector.

The Infosys Guidance Debate: To Cut or to Hold?

A central focus for the market this earnings season is whether Infosys, often seen as the industry bellwether, will “walk back” its annual revenue guidance. Current expectations for the firm’s FY27 performance have become a point of sharp debate among analysts: Motilal Oswal expects Infosys to lower the upper end of its FY27 revenue growth guidance by 50 basis points, moving the range to 1.5–3.0% YoY CC.

J.P. Morgan is even more cautious, predicting a cut to organic revenue guidance (excluding the Optimum acquisition) from 1.5–3.5% down to 1–2.5%. They note that following global peer Accenture’s guidance cut, Indian firms may choose to preemptively lower expectations rather than wait for the second quarter.

In contrast, Nomura expects “no fireworks” but believes Infosys will maintain its current guidance of 1.5–3.5% organic growth, supported by a 20-22% EBIT margin band. For the first quarter specifically, Infosys is expected to lead large-cap growth with a ~2.0% QoQ CC increase, though roughly half of that is estimated to come from inorganic contributions like Optimum and Stratus.

The AI Paradox: Deflation Before Reflation

Perhaps the most significant structural shift highlighted is the “AI Fog.” J.P. Morgan argues that the industry is stuck in a three-stage adoption cycle: Deflation → Digestion → Reflation.

Currently, IT firms are in the Deflation stage. “AI-led productivity gains in legacy/maintenance-heavy areas are not entirely compensated by new AI services,” the bank’s APAC research head, Ankur Rudra, notes.

This has created a revenue drag of approximately 2-4%, as clients demand lower prices for tasks that GenAI can now automate. A positive inflection point—where AI services cross 30-50% of the revenue mix—is estimated to be at least four years away.

The Valuation Reset: A New ‘Normal’

Reflecting this structural slowdown, analysts have aggressively cut target multiples across the board. Target P/E multiples have been slashed by 10-25%, with firms now trading closer to, or even below, their pre-Covid historical averages.

“Structural growth is stuck at below 5% now vs 7-8% earlier,” J.P. Morgan notes, justifying its decision to downgrade HCLT, Wipro, and Tata Technologies to ‘Underweight’. Even while valuations appear “inexpensive” (Tier-I valuations are 30-40% below their 5-year averages), Motilal Oswal warns that returns will remain “capped” until there is clear evidence that AI-led opportunities can offset productivity headwinds.

‘We need Saul’ moment

Despite the gloom, the sector remains a “mixed bag”. The Resilient: BFSI (Banking, Financial Services, and Insurance) remains the most stable vertical, supported by large-deal ramp-ups. TCS is expected to defend its margins despite annual wage hikes, while Infosys is seen as a “net gainer” of market share.

The Laggards: Wipro is expected to report a revenue decline of 1.3% QoQ, continuing to “sharply lag peers”. HCLT faces a “permanently lowered margin band” as it prioritizes growth over profitability.

The Mid-Cap Spark: Mid-tier firms like Persistent Systems and Coforge are expected to outperform their larger rivals, with growth estimates ranging up to 4.8% QoQ, driven by specialized deal wins and acquisitions like Encora.

As the first-quarter results trickle in, the narrative is no longer about when growth will return, but rather how these firms will manage the structural transition to an AI-first world. Until revenue growth accelerates and the “AI fog” clears, analysts expect the sector to remain in a “show me” phase, where only consistent execution will earn a re-rating.

Venkatesh G