HSBC on India IT stocks outlook
While a lack of clear real-world evidence on how AI could reshape the sector led to the hammering of IT stocks and depressed their valuations, analysts at HSBC believe there is still limited concrete data to confirm whether AI will significantly replace traditional software development and services.
“For both AI believers and sceptics, a lack of substantial real-world tangible case studies to support claims of AI cannibalisation of traditional software. The lack of clarity, however, has left investors cautious, leading to stock valuation de-rating,” the global brokerage said in a recent note.
Going forward, HSBC believes that the management’s guidance in the upcoming June quarter results of the new financial year 2026-27 (Q1FY27) will crucially shape investor expectations.
“We expect companies to shift away from ‘beat-and-raise’ guidance to more ‘realistic to even aggressive’ guidance,” it said.
AI guidance by Infosys, HCL Tech
HSBC expects Infosys to provide revenue growth guidance in the range of 2.5 per cent to 5 per cent for FY27. While the upper end of this range may appear optimistic, HSBC said it would indicate a recovery in demand compared with the previous year.
During their last earnings call (for Q4FY26), Infosys pointed towards an improvement in demand in the banking and energy verticals. Together, these verticals constitute nearly 41 per cent of total revenues for Infosys, HSBC noted.
Meanwhile, HSBC expects HCL Tech’s FY27 guidance to be slightly stronger with a projected range of 4.5 per cent to 6.5 per cent growth.
The brokerage noted that HCL Tech’s management has repeatedly highlighted the resilience of its business mix in navigating the evolving AI landscape.
“The company’s recent deal wins and a strong exit rate from the previous financial year could also support relatively better growth guidance,” HSBC said.
‘Supportive macro environment’
Additionally, analysts at the global brokerage said that the broader macroeconomic environment for the IT sector remains supportive despite the uncertainty around AI.
HSBC pointed out that many large global corporations, that are key clients for Indian IT firms, have reported strong earnings in recent quarters.
“Strong profitability among US corporates, which form a significant portion of the client base for Indian IT companies, could support technology spending,” the brokerage noted, adding the forward earnings expectations of the S&P 500 were upgraded further in Q4FY26.
That said, HSBC cautioned against guarded investments by IT firms in the near-term as companies navigate the new, evolving technology and uncertainty around the adoption curve.
Rapid developments in advanced AI models and uncertainty around how quickly enterprises will adopt these technologies could temporarily slow spending decisions, it said.
IT stocks’ investment thesis
In this backdrop, HSBC analysts said the outlook for Indian IT sector is being shaped by four interconnected forces, with AI-related deflation currently dominating investor discussions.
Based on its analysis across 13 revenue segments within the IT services industry, the brokerage estimates potential AI-driven pressure of about 14-16 per cent.
However, HSBC believes that other structural drivers could counterbalance this impact.
Strong corporate earnings in the US, improving business confidence, and productivity gains from AI are expected to encourage companies to invest more in enterprise software, cloud migration, legacy technology modernisation, and AI integration.
“On a net basis, these forces could still lead to mid-single-digit growth for some IT companies,” the brokerage said with a ‘Buy’ rating on Infosys and a ‘Hold’ rating on HCL Tech.
=============== Disclaimer: Views and outlook shared belong to the brokerage/analysts and are not endorsed by Business Standard. Readers’ discretion is advised.
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