After a steep fall last week, IT stocks are relatively calm in Monday trade, with several counters trading in the green even as concerns over AI-led disruption continue to weigh on sentiment.
According to the sector update by Motilal Oswal, the Nifty IT Index had declined 15% month-on-month, reflecting what the brokerage called a “narrative shock” around artificial intelligence and its potential impact on IT services.
However, Motilal Oswal said current prices already imply muted long-term free cash flow growth, suggesting that much of the near-term uncertainty may be factored in. The brokerage noted that reverse DCF calculations indicate the market is discounting an average 10-year FCF CAGR of about 6.5%, which is among the lowest seen in the past two decades outside crisis periods.
IT stocks trade higher after recent decline
A qyick look at the list of Information and technology stocks highlights that some of the big gainers at this hour are Happiest Minds Technologies, whichrose 3.88% to Rs 386.70, while Mastek gained 2.29% to Rs 28.18. InfoBeans Technologies was up 1.79% at Rs 880.5,5 and KPIT Technologies advanced 1.78% to Rs 876.90. Intellect Design Arena climbed 1.41% to Rs 689.80, while Ksolves India was up 1.38% at Rs 287.05. Larsen & Toubro added 1.22% to Rs 3,555.25, and BLS E-Services rose 1.22% to Rs 166.35.
Persistent Systems advanced 0.59%, and MphasiS Oracle Financial Services also gained about half a percent each.
Motilal Oswal on Indian IT services: What is the market pricing in?
In its recent sector note titled ‘Indian IT services: Assessing the narrative shock’, Motilal Oswal examined whether the current correction reflects a structural reset or a cyclical phase.
The brokerage said, “IT services stocks have been struck down in the last month, with the Nifty IT Index losing 15% MoM,” adding that the debate centres on whether AI represents a structural break to terminal growth assumptions or only temporary pressure on growth and margins.
Motilal Oswal’s reverse Discounted Cash Flow (DCF) analysis suggests that at current prices, the market is discounting a 10-year Free Cash Flow (FCF) CAGR of around 6.5%, compared with nearly 40% during crisis periods such as the Global Financial Crisis (GFC) and 12–13% in recent cycles. It added that large-cap IT companies are trading at FCF yields of 5.8% for FY27E and 6.2% for FY28E, which it described as “levels approaching prior cyclical troughs”.
On the near-term impact of AI, Motilal Oswal said it has previously estimated that 12–15% of sector revenue faces direct exposure to AI-driven productivity or displacement risk, with additional pressure from automation layers.
Motilal Oswal on Indian IT services: Possible scenarios
The brokerage laid out two possible paths for the IT sector stocks. In a front-loaded deflation scenario over 12–18 months, revenue growth could slow sharply across FY27–FY28E, potentially leading to 10% EPS cuts across large-cap coverage. In such a case, large caps could trade at around 18x FY27/FY28 earnings, compared with 15–16x at the bottom of the last cycle.
In a more gradual scenario, enterprise complexity and legacy systems could slow AI adoption, allowing cyclical recovery to partly offset deflation. Motilal Oswal noted that aggregate revenue and EBIT growth bottomed out around two quarters ago, with improvement visible in 3QFY26 across large, mid, and small caps.
On the longer-term debate, the brokerage said, “In the long term, answers to whether the industry goes extinct, thrives, or just survives won’t come by easily. In the short term, we stick to forecasting earnings growth for the next two years, which, as shown earlier, seems to be improving.”
Conclusion
Motilal Oswal’s analysis suggests that valuations already reflect cautious growth assumptions. The key monitorable, according to the brokerage, remains the pace and depth of AI-driven deflation and whether cyclical recovery can sustain earnings momentum over the next few quarters.