Selling, AI concerns around Indian IT stocks overdone: Jignesh Desai

FY27 earnings growth could be broader, with mid and smallcaps leading the upside, while AI fears around IT stocks are overdone, says Centrum Broking's Jignesh Desai

Earnings growth in 2026-27 (FY27) is likely to be more broad-based, but the major upside is expected to come from mid and smallcap stocks, said Jignesh Desai, chief executive officer for institutional equities at Centrum Broking, in an email interview with Puneet Wadhwa. Edited excerpts: 

What are the key risks to the Indian equity markets over the next six months? 

One key risk is a global currency shock. If US bond yields move materially higher or the dollar strengthens sharply, it could tighten financial conditions for emerging markets and temporarily disrupt capital flows into India, even if domestic fundamentals remain intact. 

The second risk lies in how earnings pan out from here, though I believe they are likely to trend higher on the back of various steps taken by the government to spur domestic demand. Markets are factoring in a gradual improvement in demand and margins across several sectors. If this recovery proves uneven or slower than expected — especially in discretionary and export-oriented segments — it could cap market upside. 

The third risk is geopolitical or trade-related volatility. While the broader trajectory on trade is positive, global geopolitical black swan events can quickly hit sentiment and trigger short-term risk aversion. 

Where is leadership likely to come from if markets move higher from here? 

Leadership is likely to come from domestic cyclicals, led by financials. The third-quarter (October–December/Q3) performance in 2025-26 (FY26) has already shown a meaningful improvement in the sector: margins have expanded, credit costs remain well contained, and asset quality trends are stable.

 

With the fourth quarter (January–March/Q4) typically being the strongest for lenders, earnings momentum is clearly turning more favourable, setting up the sector well for leadership.

 

Capital goods and industrials are another key area to watch. Automotive could also participate, supported by easing input costs and a gradual recovery in demand, particularly in segments where product cycles and mix improvements are favourable.

 

Are the artificial intelligence (AI)-related concerns and the resultant selling in information technology (IT) stocks overdone? 

Yes, the selling and AI-related concerns around Indian IT stocks are overdone. First, Indian IT companies have been pivoting towards AI-led deal wins, as reflected in the robust deal total contract value in Q3FY26. AI-based tools — many still in development — are already being deployed and should help drive new business opportunities.

 

Going ahead, there will be a greater focus on fixed-price projects, which should help IT companies improve margins through automation. While there may be some price deflation, volumes are likely to rise, allowing the overall value of work to grow at 5–6 per cent per annum in constant currency terms for top-tier IT companies.

 

Finally, valuations for most IT companies are below their five-year averages. It makes sense to add select IT stocks at current levels. Our top picks are Infosys, rebadged LTM (earlier LTIMindtree), and Coforge.

 

Earnings outlook for FY27? 

For FY27, earnings growth is likely to be more broad-based, with the major upside coming from mid and smallcap stocks. Largecaps should continue to deliver steady and predictable earnings, but positioning is relatively crowded, limiting the scope for sharp upside.

 

In contrast, mid and smallcaps are emerging from a phase of significant deleveraging, with leverage down by nearly 50 per cent and valuations corrected by 30-40 per cent from earlier peaks. As earnings visibility improves and operating leverage kicks in, this segment offers the strongest potential for upgrades and a sharper run-up.

 

On the risk side, trade-exposed sectors — particularly those linked to the US, such as textile — remain sensitive to global demand and policy outcomes. Any escalation in geopolitical or energy-related disruptions could act as a near-term negative. Overall, FY27 is likely to be characterised by mid and smallcap leadership, driven by lighter positioning, improving earnings, and a better risk/reward balance.

 

Your investment strategy? 

In 2025, our strategy focused on capital protection and selectivity, given global uncertainty and uneven earnings visibility. As we move into 2026, the stance has turned more constructive. With lighter positioning and clearer signs of an earnings recovery, the market is likely to make new highs over the next six months, in the 27,500–28,000 range for the Nifty.

 

From a portfolio perspective, we remain overweight financials, capital goods, autos, and manufacturing-led themes, including electronics manufacturing services, where earnings momentum and operating leverage are improving.

 

By when do you see foreign institutional investors (FIIs) returning to Indian equities with animal spirits? 

FIIs are likely to return with animal spirits once there is greater visibility on growth, currency stability, and a sustained recovery in real earnings. In that context, trade deals could act as a key catalyst.