IT stocks may have priced in too much AI risk: Kotak Institutional Equities

The sharp sell-off in IT stocks may be overdone, with valuations now reflecting excessive pessimism around artificial intelligence (AI), according to Kawaljeet Saluja, Senior Executive Director & Head of Research at Kotak Institutional Equities.The Nifty IT index plunged 20% in February, its worst monthly fall since September 2008, as investors worried about AI-led disruption. But Saluja argues that the market has already priced in too much damage.

“We do believe that GenAI would be deflationary for the sector. We had published multiple reports highlighting the magnitude of deflation, which is three-odd percent over a period of three years,” he said. While 2026-27 (FY27) will likely be the second year of this deflationary phase, he expects growth to be marginally better than 2025-26 (FY26).
Despite these manageable estimates, stock prices suggest a far bleaker outlook. According to Saluja, current valuations for some large-cap IT firms imply perpetual revenue growth of just 3%, which he described as inexpensive. Indian IT services stocks have corrected 30–40% in recent weeks and are now trading at 16–18 times FY27 estimates.

Also Read: AI boom may benefit power, metals more than IT, says Manulife’s Rana Gupta
Investor mood, however, remains cautious. Saluja called it a mixed bag, adding that “concerns right now outweigh opportunities.” He acknowledged that “Amongst the investors there is anxiety,” particularly about whether AI-led deflation could be sharper than forecast.

He also pointed to the rapid evolution of AI tools, including recent developments such as the automation of legacy code modernisation. While such tools increase efficiency and introduce near-term deflationary pressure, he distinguished automation and accountability. Large enterprises may automate tasks, but they will still rely on service providers for architectural decisions, testing, risk management and overall delivery responsibility.

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

The key concern for markets, he said, is timing. Deflationary impact is immediate, while the revenue upside from new AI-driven projects will take time to emerge. “In this disruption, what is clear for everyone is that they are clear that at least IT services get impacted… The upsides are not which is very clear, which is basically where you are seeing the current disconnect and panic and stock prices here,” he concluded.

For the entire interview, watch the accompanying video

Catch all the latest updates from the stock market here