AI fears overdone? Emkay turns 'Overweight' on IT, adds Infosys, HCL Tech

Emkay Global has turned 'Overweight' on Indian IT sector after Nifty IT fell 21 per cent in February 2026. It sees a 3-year return potential of up to 25 per cent with limited downside.

Domestic brokerage Emkay Global Financial Services has turned 'overweight' on the Indian IT sector as it believes the recent tech rout, driven by fears around generative Artificial Intelligence (AI), has been excessive and has created an attractive entry point for investors. 

The IT sector valuations, it said, are "too attractive to ignore" as the market has "over-reacted to the AI threat". 

Though the brokerage cautioned that the long-term growth of the Indian IT sector may remain modest with the structural growth rate likely settling below 5 per cent in dollar terms, Emkay Global sees "little merit in the alarmist projections of a vicious contraction".

 

 

Emkay Global increases exposure to IT sector

Emkay Global has raised technology exposure in its model portfolio to 10 per cent from 7 per cent even as it noted that the change in stance is an "opportunistic call" rather than a "structural re-rating thesis".   

The brokerage has exited Mphasis and added Infosys and HCL Tech, while retaining Hexaware Technologies. 

  The brokerage prefers large-caps as they "offer lower risk, more visibility, better valuations vs smaller peers".

  On the bourses, the Nifty IT index has plunged 21 per cent, thus far, in February and is hovering near its lowest level (30,053) since August 2023. 

 

Why has Emkay Global turned 'Overweight' on Indian IT sector?

The biggest driver of the 'Overweight' stance, Emkay Global said, is the valuation comfort.  

The sector is now trading in the 14-18 times price-to-earnings (P/E) with 4-6 per cent free cash flow (FCF) yields. This, the brokerage said, implies that the market has already factored-in anemic growth.

  "Anemic long-term growth has now been priced in, and there are select stocks that offer outperformance opportunities. We see potential three-year returns between 13-25 per cent in a bull case and 1.6-13.4 per cent in a bear case," Emkay Global said in its report.

  We are not building in a zero terminal growth scenario as that is an ultra-bearish, alarmist scenario that will not play out, it added.

  "A scenario where the IT sector will recede into oblivion is unrealistic," it said.  CHECK Stock Market LIVE Updates 

IT sector growth outlook by Emkay Global 

Emkay Global's channel checks suggests that while there is low visibility on the pace of changes, a few notable trends have emerged or may emerge in the IT sector. 

First, Emkay said AI is likely to spawn many more use cases and push companies to look for solutions that were earlier unviable with pure human coding. 

  "At the micro level, existing contracts could see significant deflation – but that is likely to be offset by new projects as companies push frontiers of tech solutions," it said.

  Second, with improved productivity, the ability of IT companies to pivot toward outcome-based solutions will determine their ability to retain margins.

  Third, Emkay noted that despite all the buzz, AI coding and solutions are largely not enterprise-ready. They work, it said, in an assisted environment and cannot be deployed natively in applications. 

  Given this, the brokerage assumes US dollar growth rate of 3 per cent (for the sector) in their base case, taking into account a higher cost of equity.

  In their bull case, the brokerage assume that the sector largely weathers the storm and continues at 3.5 per cent dollar growth to perpetuity. 

  Meanwhile, in their bear case, Emkay Global predicts the sector to shrink by 10 per cent over 5 years before resuming a terminal growth rate of 3 per cent in dollar terms. 

  "Our bear-case scenario of 'destruction before recovery', however, may not materialize. Near-term revenue could see tailwinds from legacy modernisation, as AI now makes it cost feasible to revamp old systems; AI transformation projects could see upfront income, but many enterprises may need to invest in data clean up projects before they can adopt AI at scale," it added. 

 

Impact of IT slowdown on Indian economy

That said, at the macro level, analysts at Emkay cautioned that an extreme downturn in IT would have spillover risks for the economy.  

IT exports accounted for about 6.5 times (645 per cent) the current account deficit (CAD) in the first half of this financial year (H1FY26), and listed IT companies represent over 11 per cent of total wages.

  "A sharp contraction would weigh on discretionary consumption, banking asset quality, and real estate demand," it said, adding such a scenario playing out has a remote probability.      ====================  Disclaimer: The views and investment tips expressed by the brokerage in this article are their own and not those of the website or its management. Business Standard advises users to check with certified experts before taking any investment decisions.