TCS, Infosys Shares Before Q4: Buy The Dip Or Fear The AI Disruption?

Indian IT stocks are heading into the March quarter earnings season on a weak footing, with the Nifty IT index down nearly 20% so far this year. The key dilemma for investors is whether this sharp correction presents a buying opportunity ahead of Q4 results or if deeper concerns around demand and artificial intelligence (AI) remain too significant to ignore.

Demand Weakness Clouds Near-Term Outlook

Brokerages and analysts remain cautious about the near-term outlook, citing soft global demand and restrained discretionary spending by clients. Ravi Singh of Master Capital Services expects a subdued Q4, with modest revenue growth and weak deal momentum as companies continue to grapple with demand-side challenges.

Emkay also anticipates muted growth in the March quarter, attributing it to

fewer working days and continued client caution. While the BFSI segment is expected to hold up relatively well, recovery across sectors such as healthcare, manufacturing, retail, and hi-tech remains uneven.

Growth Likely to Stay Muted

Sequential growth across the sector is expected to remain weak. ICICI Securities estimates constant currency revenue growth in the range of -0.3% to 3.2% for Q4, suggesting that most firms may report flat or marginal expansion. Similarly, Jefferies expects overall revenues to remain largely unchanged on a quarter-on-quarter basis, reinforcing the view that demand recovery is yet to gain traction.

Margins Face Mixed Pressures

The pressure extends beyond revenues, with margins likely to remain mixed. Wage hikes, restructuring expenses, and deal ramp-ups are expected to weigh on profitability. However, the recent depreciation of the rupee has offered some relief. According to Emkay, currency tailwinds could partly offset macroeconomic uncertainties and evolving pricing dynamics.

AI: Opportunity or Overhang?

Artificial intelligence has emerged as a key structural factor influencing investor sentiment. According to JM Financial, concerns around generative AI—alongside geopolitical risks such as tensions in West Asia—have significantly contributed to the sector’s underperformance.

AI presents a dual narrative. On one hand, it is expected to drive productivity gains and unlock opportunities in automation, cloud, and digital transformation. On the other, it raises fears of pricing pressure and potential deflation in IT spending.

ICICI Securities noted that while AI-led productivity gains may initially weigh on margins, concerns about immediate deflation could be overstated. Stable client budgets and a steady pipeline of large deals may help cushion the impact in the near term.

Sentiment Remains Fragile

Investor sentiment has been volatile. The sector saw a brief recovery in January, outperforming the broader market, but this momentum reversed sharply in February and March amid rising AI concerns and geopolitical tensions.

Looking ahead, market participants are likely to focus more on FY27 guidance than on Q4 performance alone. Jefferies expects large IT firms such as Infosys and HCLTech to guide for modest growth of 2–6% year-on-year, indicating a gradual rather than sharp recovery.

Valuations Offer Limited Comfort

Valuations remain another key factor. JM Financial noted that the sector is currently trading at around 18 times FY27 earnings, with limited scope for re-rating unless concerns around AI and growth visibility ease.

Given the current backdrop, analysts are refraining from aggressive buying recommendations. Investors are advised to remain selective and focus on companies actively adapting their business models to incorporate AI.

Brokerages have already begun to differentiate within the sector. Emkay has upgraded Coforge and eClerx, while JM Financial prefers Infosys among large-cap names and Mphasis in the mid-tier segment.

While the sharp correction in IT stocks has made valuations more attractive, uncertainty continues to dominate the outlook. Weak demand, cautious client spending, and evolving AI dynamics remain key overhangs, suggesting that any recovery in the sector is likely to be gradual rather than immediate.