Domestic brokerage MOFSL on Thursday said IT stock valuations are inexpensive, but returns may be capped until clarity emerges on AI disruption. The broking firm said earnings for IT services results did little to allay fears of disruption in the sector, with 40 per cent of companies missed revenue estimates, 40 delivered in line and 20 per cent beat estimates. Even as 66 per cent of IT firm met or beat margin estimates, MOFSL said questions around structural demand drivers remained unanswered.

Top IT stock picks 
MOFSL continued to prefer bottom-up plays, preferring Tech Mahindra Ltd in largecap; and Coforge Ltd and KPIT Technologies Ltd in mid-tier IT pack. MOFSL also like HCL Technologies. Despite a short-term miss on growth guidance, it said HCL Tech  is preparing for the next phase of growth.  

IT stock returns capped
MOFSL said tier-1 IT valuations are 20 per cent and 31 per cent below their 10-year and 5-year averages. Tata Consultancy Services Ltd (TCS) and Infosys Ltd are trading around 40 per cent and 26 per cent below their 10-year averages, while HCL Tech and TechM are trading closer to their 10-year averages, MOFSL said. 
"Until deflationary pressures ease and new AI-led implementation use cases emerge, returns are likely to remain capped," the brokerage said.

IT sector outlook for FY27
MOFSL said Q4 margins by IT firms broadly met or beat expectations, largely aided by favorable currency movement, pyramid rationalisation, SG&A efficiencies, and improving productivity. MOFSL said rupee depreciation against dollar provided a sharp translation benefit across the board, with 10 out of 16 tracked IT firms reporting sequential improvement in EBIT margins.

"However, FY27 may see renewed pressure as wage hikes kick in, and AI investments and large-deal ramp-ups play out. Pricing pressures in a muted demand environment and ongoing deflationary trends could further weigh on profitability. In addition, we believe the GenAI curve remains margin-dilutive in the near term as investments are ramping up, but monetization is yet to follow," MOFSL said.

Margin outlook
It believes that if the exchange rate stabilises near current levels, incremental margin expansion could prove difficult. We expect margins to remain largely flat over the next 18–24 months across the industry.

"In our view, any company that expands margins meaningfully from here will do so through workforce productivity, not revenue growth," MOFSL said.