IT Sector Valuations Turn Attractive After AI Sell-Off: Emkay; Adds Infosys, HCL Tech; Exits Mphasis in Portfolio Reset

Why It Matters

The overweight stance signals a renewed investment case for Indian IT firms, whose performance influences the country’s export earnings and wage growth.

Key Takeaways

• Valuations now 14‑18× PE, 4‑6% FCF yield.
• Emkay forecasts 6.5‑18.3% potential returns.
• AI seen as efficiency driver, not revenue killer.
• Added Infosys, HCL Tech; exited Mphasis.
• IT sector supports India's current‑account and wage growth.

Pulse Analysis

The recent pullback in Indian IT stocks, sparked by concerns that artificial intelligence could erode traditional service contracts, has created a pricing gap that investors are beginning to exploit. Emkay Global highlights that current multiples of 14‑18 times earnings and free‑cash‑flow yields of 4‑6 percent are well below historical averages for the sector. By positioning itself marginally overweight, the firm is betting that the market has over‑reacted to AI hype, and that a correction in sentiment will unlock upside for well‑positioned players such as Infosys and HCL Technologies.

Beyond the headline numbers, the AI narrative is more nuanced. While generative AI tools are still maturing for enterprise deployment, they promise significant productivity gains that can lower operating costs across the IT value chain. This "Jevons effect" suggests that efficiency improvements may expand overall technology spend, offsetting any loss of contract size. Moreover, outcome‑based pricing models mean that margin enhancements are likely to stay with service providers rather than being fully passed to clients, further strengthening earnings potential for firms that integrate AI into their offerings.

The macro backdrop amplifies the sector’s importance. IT exports account for a sizable share of India’s current‑account balance, and the industry’s high‑paying jobs drive consumer spending and retail credit growth. Emkay’s portfolio adjustments—adding Infosys, HCL Tech, Indus Towers and SRF while dropping Mphasis—reflect a belief that the upside from legacy modernization projects and emerging AI transformation work outweighs the perceived risks. Investors should monitor hiring trends in global capability centres and the pace of AI adoption, but the consensus view points to a resilient, value‑rich Indian IT landscape.