Earnings estimates for IT firms in FY27 have been reduced by 1%, with target multiples for large-cap IT services and BPO firms also seeing a decline due to uncertainties surrounding AI adoption, as per a recent report. Emkay Global Financial Services Ltd adjusted the FY27 and FY28 earnings estimates for large-cap IT services companies by 1% and 2% respectively. The report highlighted that the implied terminal growth for covered large-cap IT services companies is now at 5–6% in rupee terms, based on trends from the past decade.
The report further mentioned a reduction in target multiples by approximately 20% for IT services and 32% for BPOs. It emphasized that consistent operating performance and transparent disclosures to assess advancements in the tech sector will be crucial in boosting investor confidence and improving valuations. Emphasizing the need for steady performance delivery and enhanced disclosures in the upcoming quarters, the report suggested that this could help rebuild trust in the business model and potentially lead to a reevaluation of ratings.
Nifty IT has witnessed a decline of 13% and 17% compared to Nifty over the last one-month and three-month periods, respectively, primarily due to concerns about the sustainability of the business model and the potential disruption from AI advancements in Indian IT Services, the report added. The forecast indicated that as clients face challenges in adapting to a rapidly changing tech environment and integrating AI into existing systems, IT Services companies are expected to transition towards consulting-led strategic partnerships, moving away from traditional effort-based execution to become trusted advisors.
The report highlighted that AI is reshaping the IT Services industry by automating repetitive tasks previously handled by junior engineers, leading to a flattening of the traditional staffing pyramid as AI agents reduce billable volumes. It noted that GenAI is driving significant productivity improvements in testing, documentation, and legacy migration, setting higher expectations for cost savings, especially during contract renewals.
