IT Firms’ FY27 Earnings Estimates Cut by 1% as AI Transforms Services: Report

New Delhi- Earnings projections for IT companies for FY27 have been revised downward by 1 per cent, while valuation multiples for large-cap IT services and BPO firms have softened amid uncertainty surrounding the pace and impact of artificial intelligence (AI) adoption, according to a report released on Friday.

A report by Emkay Global Financial Services Ltd reduced its FY27 and FY28 earnings estimates for large-cap IT services companies by 1 per cent and 2 per cent, respectively.

The report noted that the implied terminal growth for the covered large-cap IT services firms now stands at around 5–6 per cent in rupee terms, broadly aligned with growth trends observed over the past decade.

Additionally, the brokerage cut its target valuation multiples by approximately 20 per cent for IT services companies and by about 32 per cent for BPO firms.

According to the report, consistent operational performance and better disclosures on companies’ progress in adapting to the ongoing technological transition will be key to restoring investor confidence and supporting valuation recovery.

The firm also emphasised that steady performance delivery along with clearer updates on technology transformation over the coming quarters could help rebuild confidence in the sector’s business model and potentially lead to a reassessment of company ratings.

Meanwhile, the Nifty IT index has declined by 13 per cent and 17 per cent compared to Nifty over the past one month and three months, respectively. The drop has been driven by concerns over the long-term sustainability of the sector’s traditional business model and fears that rapid advancements in AI could disrupt Indian IT services.

The report observed that as clients navigate a rapidly evolving technological landscape and face challenges integrating AI with legacy systems, IT services companies are expected to move higher up the value chain. This shift may involve transitioning from effort-based service delivery to consulting-led strategic partnerships, positioning themselves as trusted technology advisors.

It further highlighted that AI is reshaping the IT services industry by automating repetitive and high-volume tasks that were previously handled by junior engineers. As a result, the traditional staffing pyramid is flattening, with AI-driven automation reducing the volume of billable work.

The rise of generative AI is also delivering significant productivity improvements in areas such as software testing, documentation, and legacy system migration. This, in turn, is raising client expectations for cost efficiencies, particularly during contract renewals.

With inputs from IANS