A CLSA report indicates India's IT sector has avoided deflationary impacts from AI and the US-Iran conflict in Q4 FY26. Despite minor client decision delays, demand in BFSI remains strong, deal pipelines are robust, and valuations are attractive.
The IT sector has not witnessed any deflationary impact in the fourth quarter of FY26 so far, either from artificial intelligence (AI) developments or the ongoing US-Iran conflict, according to a report by CLSA. The report stated this based on its discussions with major IT companies, including TCS, Infosys, HCL and Wipro, ahead of the silent period, said there is no evidence of increased deflation in renewal contracts due to the latest AI tools from Anthropic and OpenAI since their launch.
Vertical-wise Demand Commentary
It stated "4Q26: No increase in AI-led deflation 1st AI (artificial intelligence) in control; 2nd AI (America-Iran) not yet" The report highlighted that vertical-wise demand commentary remains intact across companies. The BFSI segment continues to see tailwinds for all four companies. The technology vertical is performing well for HCL and TCS, while retail, auto and healthcare segments remain soft.
Client Decision-Making and External Factors
It also noted that a few companies have flagged a slight delay in decision-making by clients. This is attributed to the launch of the latest AI tools, as clients are assessing their true potential, along with uncertainty arising from the ongoing Middle East crisis. It stated, "A few companies flagged a slight delay in decision making by clients due to the launch of the latest AI tools to explore their true potential and due to the ensuing Middle East (ME) crises".
Impact of Middle East Crisis
On the Middle East situation, CLSA stated that direct revenue exposure for all four companies (TCS, Infosys, HCL and Wipro) remains in low single digits. However, the broader macroeconomic impact will depend on the duration of the crisis and its effect on inflation, interest rates, GDP growth and overall IT services spending.
Strong Deal Pipelines and Valuations
Despite these concerns, the report pointed out that deal pipelines remain strong. It added that valuations for India's IT sector, currently at their 10-year average, appear highly attractive.
According to CLSA, while near-term uncertainties persist due to global developments, there is no immediate sign of disruption in the sector's performance in the ongoing quarter. (ANI)
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