The IT stocks have seen some smart recovery after two tough months on fears of AI-led disruption. CLSA, however, seemed significantly positive. The international brokerage house after discussing with key tech sector majors including TCS, Infosys, HCLTech and Wipro, highlighted that they “find no evidence of increased deflation in renewal contracts due to the latest AI tools from Anthropic and OpenAI since their launch.”
CLSA has maintained ‘High-conviction Outperform’ ratings on Persistent Systems and Coforge. For Coforge the brokerage has set the target price of Rs 2,278, implying an upside of 112.5%.
For Persistent Systems, it has set a target price of Rs 8,058, implying an upside of 77.6%. It has ‘Outperform’ ratings on Infosys, Tech Mahindra, TCS and LTIMindtree. However, it has set a ‘Hold’ ratings on HCLTech and Wipro. CLSA sees vertical-wise demand commentary remains intact with BFSI continuing to see tailwinds for all four companies.
AI-led deflation limited; IT firms not cutting prices
The brokerage said that after discussions with major companies such as Tata Consultancy Services, Infosys, HCLTech and Wipro show no signs that the latest AI tools from OpenAI and Anthropic are decreasing prices in renewal contracts.
According to CLSA, TCS said AI will be a positive driver for the IT industry. The company sees big opportunities in building applications using AI tools. TCS is also in advanced talks with Anthropic to form a partnership, similar to its existing collaboration with OpenAI.
HCLTech said AI is still causing around 2–3% annual price reduction in services. However, the company expects strong growth in demand to offset this impact. Key growth areas include custom silicon chip design, physical AI, robotics, intellectual property (IP) revenue, and marketing-as-a-service.
Middle East tension yet to materially impact demand
CLSA also noted that the ongoing geopolitical tensions in the Middle East have not significantly affected the Indian IT sector so far.
TCS has low single digits exposure to the Middle East and the company believes they are in “better macro position currently than the same time last year when tariff-related uncertainty started,” TCS said according to CLSA.
Infosys saw no change in demand conditions compared with what it had guided during its January earnings call. The company expects the banking, financial services and insurance (BFSI) and energy and utilities (E&U) sectors to perform better in FY27 than FY26, driven by higher discretionary spending and new deal wins. Infosys’ demand outlook has remained largely stable between quarters.
CLSA highlighted that the BFSI sector continues to see strong discretionary spending across TCS, Infosys, HCLTech, and Wipro.
However, the retail and automobile sectors remain weak, similar to previous quarters. The healthcare sector is also facing new challenges, mainly due to rate cuts in Medicare Advantage in the US, which are affecting spending.
The telecom sector is expected to remain relatively stable, even if global economic conditions weaken because of rising oil prices. “This we believe this should be positive for TechM with one-third of revenue still coming from this vertical,” CLSA said.
Deal pipeline remain strong
Despite macro uncertainties, the brokerage said deal pipelines for Indian IT firms remain strong. However, companies are witnessing some delays in decision-making as clients evaluate the impact of emerging AI technologies.
Companies also expect better momentum going into the next financial year as large deals ramp up and discretionary spending improves.
Oil shocks historically have not hurt IT demand
CLSA noted that oil prices, which have spiked due to Middle East conflict leding to the disruption of Strait of Hormuz, is unlikely to disrupt IT services demand. It noted that US GDP growth and IT services spending continued to grow close to their long-term trend in the past period of high oil incident as well.
“Defensive sectors like telecom and energy/utilities tend to outperform while financials and consumer underperform during oil crisesin terms of EPS growth,” the report noted.
Conclusion
CLSA believes that valuations of Indian IT companies look attractive right now. This is because the sector is trading around its 10-year average levels, offers healthy free cash flow (FCF) yields, and the Nifty IT index is trading at a discount compared with the broader Nifty.
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.