While valuations have become cheaper over the past few months, Pathak believes investors should not rush to buy the sector just yet.
“I do remain constructive from a medium-term perspective… I do believe that eventually managed services have to pick up, and AI implementation revenues have to come in, but right now the evidence remains very, very slim,” he said.
According to Pathak, demand for AI implementation projects is emerging only in pockets, while broader macroeconomic pressures and what he described as “AI deflation” continue to create significant pressure. He warned that investors still do not know whether the sector has reached its bottom.
He also cautioned that Indian IT stocks could see further valuation cuts if earnings fail to improve. Global peers such as Accenture and Cognizant already trade at much lower valuation multiples, and he believes Infosys could move in the same direction. “I don’t have a logical answer as to why they can’t trade at single-digit premiums. If FY27 ends up being a washout, and FY28 AI implementation services don’t pick up… it’s entirely possible that it happens,” he said.
Pathak also expects HCLTech and KPIT Technologies to lower the upper end of their 2026-27 (FY27) revenue guidance. He said both companies had banked on a stronger first half, but geopolitical uncertainties, weaker demand and AI-related disruption have made those assumptions difficult to achieve.
On Coforge, he turned cautious following the company’s profit warning. While he continues to see engineering research and development (R&D) as an attractive long-term segment, he believes the warning suggests weakness could persist into the July-September quarter of 2025 (Q2FY26). Until there is greater clarity on earnings, he prefers to stay on the sidelines.
Despite his cautious stance on the sector, Pathak sees opportunities in select mid-cap IT companies that are building AI-native capabilities. He said “Mphasis stands out in terms of how they are executing,” adding that the Encore acquisition fills a key gap in product engineering. He also believes Persistent Systems could be “a decent bet over the next couple of years” because of its exposure to application modernisation. Wipro is another company he likes, although he wants more clarity on the integration of the Nagarro acquisition before turning more positive.
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Pathak also dismissed concerns around the sharp fall in Wipro‘s ADR, saying it was caused by a technical issue related to the company’s buyback process rather than any deterioration in business fundamentals. He expects the pricing gap between the ADR and the domestic stock to normalise over time.
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