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Emkay turns constructive on Indian IT after recent sell-off; check model portfolio changesBrokerage firm Emkay Global said that generative AI is still some distance away from being enterprise-ready at scale and is unlikely to have universal applicability across use cases in the near term.By Meghna Sen  February 26, 2026, 10:56:43 AM IST (Published)3 Min ReadValuations in the IT sector have turned too attractive to ignore, as the market appears to have overreacted to concerns around the disruptive impact of artificial intelligence, according to brokerage firm Emkay Global.

While the brokerage expects long-term sector growth to remain subdued at below 5%, it sees little merit in alarmist projections that point to a deep and prolonged contraction.

In its view, the current pessimism is overdone and has already been priced into stocks.

Emkay believes meaningful value emerges in the sector at 14-18 times price-to-earnings multiples, translating into a 4-6% free cash flow yield. At these levels, the risk-reward appears favourable.

The brokerage sees potential returns ranging from 6.5% to 18.3%, with limited downside risk.

As part of its portfolio rejig, it has turned marginally 'Overweight' on the sector and replaced Mphasis with Infosys and HCL Technologies in its model portfolio.

According to Emkay, an ultra-bearish scenario for IT could potentially lead to a de-rating of Indian equities, with second-order effects on the current account deficit, consumption, and the banking sector.

However, it believes such a scenario carries a remote probability.

What the market may be missing

The brokerage argues that while IT services companies are likely to lose some share of client budgets to the AI ecosystem over time, this will happen on a much larger base.

Importantly, margin gains from AI-led efficiencies may not be entirely passed on to clients, especially if outcome-based projects become more prevalent.

Emkay also said that generative AI is still some distance away from being enterprise-ready at scale and is unlikely to have universal applicability across use cases in the near term.

IT services firms, therefore, are expected to retain relevance in customising, integrating, and implementing AI-based solutions for clients.

On the ground, the brokerage sees no visible impact yet in terms of hiring trends or growth momentum. The threat from Global Capability Centres (GCCs) and insourcing is expected to persist, but largely along the same lines seen in recent years.

Its base-case scenario assumes long-term EBIT growth of 0-3% in dollar terms, with potential upside if companies adapt quickly to the evolving landscape, something the sector has historically demonstrated a strong track record of doing.

The widely cited argument of "destruction before recovery" may also prove misplaced if near-term revenue tailwinds from legacy modernisation and AI transformation projects play out as expected.

Valuations: Positive risk-reward

Emkay believes the current correction offers a good entry point and has taken a small 'Overweight' position.

It argues that anemic long-term growth expectations are now reflected in valuations, creating opportunities for selective outperformance.

The brokerage sees potential three-year returns of 13-25% in a bull-case scenario and 1.6-13.4% even in a bear case.

It prefers large-cap IT names, citing lower risk, better earnings visibility, and more attractive valuations compared to smaller peers.

As part of its Equity Model Portfolio (EMP) changes, it has replaced Mphasis with Infosys and HCL Technologies.

The brokerage describes this as an opportunistic call, acknowledging the lack of structural growth in the sector and advising investors to trade within defined ranges.

EMP changes

Additions: Indus Towers, SRF, Infosys, and HCL Technologies

Exits: Sun Pharma, Gravita, and Mphasis

Trims: Maruti Suzuki, L&T, and Craftsman AutomationContinue ReadingNote To ReadersDisclaimer: The views and investment tips expressed by investment experts on CNBCTV18.com are their own and not that of the website or its management. CNBCTV18.com advises users to check with certified experts before taking any investment decisions.TagsGenerative AIIndia IT sectorInfosys share priceIT ServicesMphasis