India IT Services Numbers vs. narrative: Moderating medium-term estimates as the tension continues - 1QFY27 preview; downgrade HCLT, WPRO, TATATECH to UW

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India IT Services Numbers vs. narrative: Moderating medium-term estimates as the tension continues - 1QFY27 preview; downgrade HCLT, WPRO, TATATECH to UW

and geopolitics. It is becoming tougher for

enterprises to formulate a clear tech strategy, which is having a trickle-down effect on IT

companies’ ability to forecast growth, as well. We see the industry stuck at 2-3%

revenue growth over the last two years, and with AI deflation still only in Year 2, we see

further headwinds over the next couple of years.

We further cut growth and multiples

We cut our medium- to long-term growth expectations and terminal growth in Mar-26

(see Earnings in the time of AI), citing that scale firms have missed high-single-digit

growth expectations consistently since FY24 thanks to AI deflation, macro- and

geopolitical-led spend uncertainty that are likely to persist into FY27. We estimate

GenAI deflation to be 2-4% annually and expect the sector to be in the first stage of the

AI adoption cycle (Year 2/3), with a couple of years of AI digestion yet to play out

before AI-led reflation keeps a strong inflection point distant. This means we do not

expect scale firms to return to their long-term average growth of 7-8% in the medium

term. We cut medium-term growth even further now and do not expect scale firms to go

back to 5% and instead stay in the 3-4% range. We now do not assume significant

growth acceleration over the medium term even for mid-cap firms, and expect them

hover around the current growth rates in the best case. Until we see AI inflation

becoming a tailwind, we would prefer to be cautious on the pace of growth recovery, as

well as structural growth for the industry. Reverse DCF math sanity checks drive our P/