Why Infosys and TCS at 22x earnings still aren't value stocks

Infosys and Tata Consultancy Services have each lost roughly a third of their market value over the past 12 months. The cause is well documented: generative AI is eroding the traditional outsourcing model that built India's IT giants. Clients are canceling small-scale maintenance contracts and demanding outcome-based pricing, which compresses margins.

ET reported the stocks are down 30% in one year. At current levels, Infosys trades at about 22 times forward earnings, TCS at about 24 times. That is cheap by historical standards – both companies averaged closer to 28 times over the last decade. A lower multiple alone does not make a value stock. The compression may simply reflect lower earnings power going forward.

Analysts who follow the sector point to several concrete risks. The deal pipeline is shifting. Large multi-year transformation contracts are being broken into smaller, faster projects that reduce revenue visibility and increase the cost of sales. AI tools let clients automate tasks that once required armies of junior developers. The hiring pattern already shows this: Infosys added fewer net employees in the last two quarters than in any comparable period since 2019. Wage inflation in India runs at 8-10% for tech talent, while billing rates have barely moved. Margins are squeezed from both sides.

Proponents argue the selloff is overdone. AI will eventually create new demand – companies will need help integrating AI into existing systems, governing data, and managing hybrid cloud environments. Infosys and TCS have deep client relationships and large workforces that can be retrained. The market is discounting a worst-case scenario that may not materialize.

The comparison with the 1991 rupee crisis, which ET also flagged, is worth noting. The rupee weakness then was tied to a balance-of-payments crisis. The current slide reflects dollar strength and portfolio outflows, not a solvency problem. A weaker rupee helps IT exporters by boosting the rupee value of their dollar revenue, which provides a modest buffer to earnings this year.

For a stock market analysis audience, the real question is what would confirm the value thesis. If Infosys and TCS can show their AI-related services – not just cost-cutting – are growing above 20% in the next two quarters, the multiple compression should reverse. If revenue growth rate stays at 3-5%, the current multiples may still be too high. The next concrete marker is the October-quarter earnings, when both companies will give guidance for the full year.

The stocks remain a debate between those who see a cyclical valuation reset and those who see a permanent structural decline. A 30% drop makes the trade interesting. The lack of a catalyst makes it risky.