- Indian IT sector fears AI disruption, but Middle East crisis poses bigger threat, says CLSA
- CLSA analyst expects AI concerns to ease after upcoming earnings season
- 80-90% of IT revenues linked to macroeconomic factors, mainly Middle East situation
The Indian IT services sector has been gripped with fears of artificial intelligence-led disruptions this year, especially following the advent of Claude Cowork. However, according to CLSA's senior research analyst Sumit Jain, the ongoing crisis in the Middle East and other macro headwinds are a bigger threat to Indian IT than AI.
Despite the prevailing anxieties in the market surrounding AI-driven pricing deflation, Jain expects the upcoming earnings season to alleviate these concerns. "I believe AI is going to be a net tailwind for the sector, and this narrative will get squashed away when these companies report earnings beat," he told NDTV Profit.
He added that traditional economic factors remain the primary drivers for tech demand. "80 to 90% of the revenues of these companies are still linked to macro. And this is where I think each one of us should be more inclined to look at how the macro shapes up around the Middle East," he stated.
Looking toward fiscal 2027, Jain anticipates a conservative but stable outlook from industry leaders.
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"I think it should be visible in the guidance given by HCL and Infosys, where we believe the Infosys guidance for FY27 at the midpoint should be better than where they will end up last year," Jain noted. "So we are building in a 2 to 5% kind of organic CC revenue growth for HCL and Infosys."
For those looking for growth opportunities, Jain prefers select mid-cap companies
"The issue with midcaps is there are some companies that are executing extremely well, the likes of Coforge or Persistent, whereas there are a lot more other players which are not doing that well," he explained.
"Irrespective of the technology changes or the macro cycles, these mid-tier IT companies that I talked about will be in a better position and from the earnings growth standpoint, we believe they will give a better earnings growth than the large cap players," he added.
However, Jain offered a cautious caveat for those navigating geopolitical volatility. "If the beta for the market goes up because of the Middle East crisis extending, then the capital preservation could be higher in the large caps in the near term," he concluded.
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