Brokerages Turn Cautious On IT Over AI Fears — Which Stocks Still Make The Cut?

Indian IT services stocks are facing heightened scrutiny as rapid advances in artificial intelligence trigger concerns over spending, margins, and long-term growth prospects, prompting brokerages such as Citi, Nomura, and UBS to reassess the sector's outlook.

Citi has flagged a cautious view, warning that AI-driven disruption, coupled with lighter domestic institutional investor positioning, could compress valuation premiums. The brokerage also highlighted risks from an uncertain demand environment, rising competitive intensity, and faster expansion of global capability centres, which could shift technology work in-house. UBS echoed similar concerns, noting that recent breakthroughs in agentic AI have led investors to lower long-term growth expectations, with valuations now reflecting weaker terminal cash flow assumptions.

At the same time, Nomura believes fears of widespread obsolescence may be overstated. Technology adoption cycles remain slow due to regulatory, compliance, and operational risks, while IT services firms have historically adapted to structural shifts. Analysts broadly expect business models to evolve from effort-based pricing toward outcome-driven and automation-led contracts, with companies increasingly using AI internally to protect margins.

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Despite near-term uncertainty, brokerages see the recent sell-off as partly front-loading risks rather than signalling a structural decline. The focus now is on how effectively companies integrate AI and reposition their offerings.

Among preferred picks, Infosys has emerged as a common large-cap favourite across brokerages, while Citi also prefers HCLTech. Nomura highlighted Coforge among mid-caps and eClerx in the small-cap space, reflecting confidence in firms with strong execution and adaptability.

Here's an overview of what brokerages are pencilling in:

Citi on IT Sector

• Citi maintains a cautious stance on Indian IT services.
• Concerns around AI and resulting lightening up in DII positions could lead to valuation gap compression.
• Higher volumes are expected, but the extent of automation-led execution and value capture remains uncertain.
• The brokerage flags an uncertain spending environment, rising competitive intensity, and faster GCC expansion as key risks.
• AI-led disruption and fragmentation of the industry are emerging concerns.
• Infosys and HCL Tech are Citi's preferred picks among large-cap IT stocks.

Nomura on IT Sector

• Nomura believes concerns around AI-driven obsolescence risks for IT services are overstated.
• The brokerage notes that replacing SaaS platforms and IT vendors with AI-driven applications is easier said than done.
• Technology adoption cycles remain slow due to compliance, regulatory, and business continuity concerns.
• SaaS companies have built strong moats around data, compliance infrastructure, and operational expertise.
• IT services firms have historically evolved successfully with technological shifts.
• Revenue models are expected to gradually shift from effort-based pricing to outcome-based pricing.
• Margin defence will depend on aggressive internal automation adoption.
• Nomura views the recent IT stock sell-off as front-loading of near-term pain.
• Preferred picks include Infosys among large caps, Coforge among mid caps, and eClerx among small caps.

UBS on IT Sector

• UBS notes that investor concerns around long-term terminal value have intensified following recent AI-related developments.
• Markets are pricing in lower terminal FCF growth of 4–6%, down from 6–7% a month earlier.
• Rapid advances in Agentic AI have raised concerns about structural disruption to traditional IT services.
• UBS believes the sector is undergoing a structural evolution in its business model.
• However, the brokerage sees signs of near-term overreaction.
• The near- to medium-term demand environment is improving.
• UBS will closely monitor how quickly IT services firms adapt to structural AI-led changes.

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