Motilal Oswal sector of the week: IT services; HCL Tech, Coforge top picks

The global technology sector has witnessed a stark divergence since the advent of generative AI in late 2022. Capital-intensive players—hyperscalers, semiconductor manufacturers, and infrastructure providers—have surged ahead, while IT services and software vendors have lagged. Data shows that a basket of AI-native, hardware-driven firms has gained over 200 per cent since late 2022, whereas software and services names are up only around 25 per cent.

 

The current cycle is less about “AI vs. non-AI” and more about “hardware vs. services.” With large language models (LLMs) and chips still scaling rapidly, enterprises are hesitant to commit to full-scale services spending, fearing premature investments. Historically, services adoption follows hardware stabilisation, as seen in prior shifts from dotcom to ERP and cloud to SaaS. Early signs of diminishing marginal returns in the latest AI models suggest this stabilisation may be approaching.

 

Enterprises remain keen to deploy AI, but most solutions are not yet enterprise-ready. The adoption lag—typically 5–8 years from consumer to enterprise use—indicates meaningful demand recovery may take another 18 months. For Indian IT, the challenge is sharper: while vendors have historically reskilled effectively through past cycles, generative AI threatens to reduce the workforce intensity of traditional application development and maintenance. Estimates suggest nearly 13 per cent of overall IT services revenue could be at risk from productivity gains in coding, debugging, and testing.

 

Margins pose another concern. The sector has previously seen erosion when shifting to fixed-price contracts, with Ebit margins falling by 150 basis points between FY15 and FY19. To avoid repetition, firms must decouple hiring from revenue growth and drive up revenue per employee.

 

Despite near-term headwinds, R&D investment is emerging as a differentiator. While capex-heavy players dominate today, firms consistently backing innovation have seen valuations buffered against the AI-driven sell-off. For services players, the structural opportunity lies in scaling pilots into production once AI models and cost structures stabilise.

 

Valuations across IT services are currently reasonable, but a sector-wide re-rating depends on the next tech cycle and earnings upgrades. The medium-term opportunity hinges on how quickly enterprises transition from proof-of-concepts to scaled GenAI deployments, and whether Indian IT firms can balance automation-led productivity with revenue growth.  Track Stock Market Live Updates 

HCL Tech – TP: ₹2,000

HCLTech remains well-placed for FY26 with healthy deal momentum, strong client mining, and stable margins. The company has retained its FY26 guidance of 3–5 per cent revenue growth and 18–19 per cent Ebit margin, underpinned by robust traction in IT services and recovery in the products segment. Strategic focus on BFSI, manufacturing, and telecom continues to drive broad-based growth. In Q1FY26, revenue, Ebit, and PAT grew 3 per cent/5 per cent/15 per cent Q-o-Q in CC terms, supported by deal wins of $2.1 billion. With consistent execution and preparedness to capture GenAI-led opportunities as enterprise adoption scales, we forecast Revenue/Ebit/PAT CAGR of 8 per cent/10 per cent/10 per cent over FY24–27.

 

Coforge – TP: ₹2,240

Coforge stands out with strong large-deal momentum, diversified vertical growth, and a clear path to $2 billion revenue by FY27. Its proactive approach has delivered a 40–45 per cent win rate in proposals, with clients funding high-RoI transformation programs despite uneven industry demand. In Q1FY26, Coforge posted 8 per cent Q-o-Q CC revenue growth, order intake of $507m (+61 per cent Y-o-Y), and a 47 per cent Y-o-Y jump in executable order book to $1.55 billion. While Ebit margin at 13.2 per cent was modest, PAT surged 142 per cent Y-o-Y to ₹3.1 billion, aided by utilisation gains. With resilient client spending and inorganic levers, growth visibility remains strong.

 

(Disclaimer: This article is by Motilal Oswal Financial Services Research desk. Views expressed are their own.)