AI disruption clouds IT outlook; Firstsource only buy: Girish Pai

Artificial intelligence (AI) could trigger a structural reshuffle in the Indian IT services industry, potentially creating a fresh set of winners and losers, according to Girish Pai, Research Analyst and Head of Institutional Equity Research at BOB Capital Markets. He believes the current disruption is not incremental but comparable to the offshore delivery shift that once transformed global IT services.“This disruption is very similar to the offshore delivery disruption that global IT services seem to be experiencing,” Pai said, suggesting that the industry could be entering a phase where business models evolve materially rather than simply adapting at the margins.

The core concern, he explained, is the uncertainty around how earnings and cash flows will evolve over the next few years as AI adoption deepens. While near-term numbers appear protected, visibility beyond FY27 is far less certain.
“We’re not very clear about what could be the trajectory of earnings and cash flow growth from here on,” he said, adding that rapid improvements in foundational AI models could alter cost structures and pricing dynamics across the industry.

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Pai also highlighted the “deployment gap” between AI’s potential and actual enterprise implementation. Although companies can demonstrate 15–20% productivity gains at a task level, scaling AI across organisations remains complex and expensive.

Nearly three years after the ChatGPT moment, only about 4–5% of sector revenues are AI-linked, indicating that enterprise adoption has been slower than technological progress.

Another structural risk lies in labour displacement. Industry projections point to 92 million jobs being displaced and 170 million new jobs being created, but Pai cautioned that the timelines may not align. A mismatch between job losses and job creation could create transition risks for IT services firms.Despite tier-one IT companies trading near or slightly below long-term valuation averages and offering healthy free-cash-flow yields, Pai remains cautious on the sector.

“I would say, be underweight the sector,” he said, warning that the apparent valuation comfort could turn into a value trap if AI-led deflation pressures intensify.

In his view, the sector is at an inflexion point. While opportunities remain, the pace and direction of AI-driven disruption make it difficult to confidently identify long-term winners at this stage.

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Reflecting this cautious stance, Pai remains underweight on the IT sector. He currently has ‘hold’ ratings on Infosys, TCS, Tech Mahindra, Wipro and eClerx, citing limited visibility on medium-term earnings despite reasonable valuations. Among his coverage, Firstsource is the only stock with a ‘buy’ rating, where he sees relatively better risk-reward within the broader uncertainty facing the sector.

For the entire interview, watch the accompanying video

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