With Nifty IT down 15% in a month and FCF yields at crisis levels, analysts ask: Is this a Kodak moment or a generational buying opportunity?
The question haunting Dalal Street’s technology corner isn’t whether AI will disrupt Indian IT services. It’s whether the disruption has already been priced in — and then some.
The Nifty IT Index has shed 15% in just one month, a bloodbath that has pushed free cash flow yields to levels last seen during genuine market dislocations like the Global Financial Crisis and COVID. Infosys, TCS, and HCL Tech — the pillars of India’s export economy — are trading as if their terminal growth has collapsed to near zero.
Brokerages have weighed in with analyses that arrive at a similar conclusion: the market may be pricing in scenarios that range from pessimistic to apocalyptic.
Motilal Oswal says: “The core question is whether AI represents a structural break to terminal growth assumptions or merely compresses growth and margins temporarily. If this is a Kodak moment, then the quantum of downside from here is moot. If it is not, the market is currently pricing an FCF CAGR that is among the lowest in the past two decades.”
JP Morgan is direct too: “It’s simplistic to assume that AI can automatically generate enterprise grade software and replace the value IT Services firms create across the cycle.”
What the Market Is Pricing In
Motilal Oswal calculates that at current prices, the market is discounting an average 10-year free cash flow CAGR of just 6.5% in rupee terms. For context, even during FY16-19 — a period of sharp deceleration — the sector delivered 13% FCF CAGR. During the crisis-era GFC, it managed 40%.
JP Morgan’s notes: “A reverse DCF implies TCS, Infosys, and HCL Tech are pricing in 4%, 4%, and 5.6% ten-year revenue CAGR respectively, implying the sector is ex-growth or at terminal growth, sharply below the long-term average of 7-8% growth.”
On an FCF yield basis, large-caps are trading at 5.8% for FY27 and 6.2% for FY28 — levels approaching prior cyclical troughs. JP Morgan notes that “FCF and dividend yields are at levels last seen at market dislocation events such as GFC, COVID, and Liberation Day.”
The Bear Case: How Bad Could It Get?
JP Morgan has modelled four scenarios to stress-test downside risk. The uber-bear case assumes zero growth in perpetuity — a complete AI-driven extinction event. Even in this apocalyptic scenario, downside from current prices is 33-39% for the large caps.
A more realistic bear case assumes current low-single-digit growth persists forever with no cyclical recovery. “We assume revenue CAGR of 2%, 3%, and 4% for TCS, Infosys, and HCL Tech, which implies potential downside of 22%, 10%, and 9% respectively,” JP Morgan calculates. “We think this is where stocks should bottom in a reasonable bear case.”
Motilal Oswal has modelled a front-loaded deflation scenario where AI disruption materializes rapidly over 12-18 months. “Revenue growth could decelerate sharply across FY27-FY28, driving EPS cuts of 10% across our large-cap coverage. On these bearish estimates, large-caps would trade at approximately 18x for both FY27 and FY28 P/E.”
The Bull Case: Plumbers Don’t Go Extinct
Both brokerages push back against the narrative that AI renders IT services obsolete. The argument centres on enterprise complexity and the irreplaceable role of human integration.
JP Morgan offers a vivid metaphor: “IT firms remain the plumbers of the technology world. While advances such as Claude code’s Cowork plugin can meaningfully accelerate complex tasks and agentic AI can write a lot more software, it’s simplistic to assume this will be enterprise grade for every function and enjoy the tribal enterprise context IT Services vendors excel at.”
The brokerage sees AI creating net new work streams rather than merely destroying existing ones: “Net new areas of work including addressing multi-decadal tech debt by modernising legacy code, rewriting custom agentic versions of SaaS, AI agents for operations, AI trust and reliability services, and physical AI integration.”
Motilal Oswal provides historical context that challenges the “this time is different” narrative. “The IT services industry originally scaled due to the challenges of maintaining large volumes of self-built, non-standardized, and security-vulnerable code. Self-built software currently accounts for 14% of total software spend, down from 35-40% in the 90s.”
The brokerage argues that in-house code generation doesn’t guarantee better outcomes: “Vendor ecosystems continue to play a critical role in systems integration, cybersecurity and governance, performance optimization, and downtime mitigation.”
Signs of Cyclical Recovery
Buried beneath the AI panic, there is evidence of improving fundamentals. Motilal Oswal observes that “aggregate revenue and EBIT growth bottomed out approximately two quarters ago, with meaningful improvement in Q3FY26 across large, mid, and small-cap companies.”
If AI deflation proves gradual rather than front-loaded, cyclical recovery could dominate near-term performance. JP Morgan’s scenario analysis shows that even marginal improvement to mid-single-digit growth keeps stocks close to current prices — suggesting limited downside if the apocalypse doesn’t materialise.
The Bottom Line
For investors willing to look past the AI fog, the setup is intriguing. Valuations reflect crisis-level pessimism. Free cash flow yields scream deep value. And both brokerages see structural reasons why IT services won’t simply disappear.
JP Morgan recommends “a barbell approach to buy deep value in large caps — Overweight rated Infosys and TCS, along with growth champions such as Overweight rated Persistent Systems and Sagility.”
Motilal Oswal maintains estimates unchanged while acknowledging the narrative shock: “In the short term, we stick to forecasting earnings growth for the next two years, which seems to be improving.”
That is to say, Indian IT is not dead yet. Just recalibrating. But the sector is likely to see continued volatility.
