Dipan Mehta remains cautious on IT sector, says TCS's AI revenue disclosure fails to impress

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Tata Consultancy Services' (TCS) recent disclosure that it generates $1.5 billion from artificial intelligence (AI) projects has been met with a lukewarm response from market expert Dipan Mehta, who remains cautious on the long-term prospects of the Indian IT services sector. Speaking with CNBC TV18, Mehta -- Founder Director of Elixir Equities -- expressed that unless large-cap technology firms demonstrate significantly higher and sustainable growth rates, they are unlikely to attract keen interest from investors like him.

TCS recently revealed that AI-related projects now account for approximately 5% of its total revenue. However, Mehta conveyed a sense of disappointment, noting that a major technological trend like AI has had 'hardly any effect on the revenues and profits of the IT services industry' over his 30-year career. He stated that his team has stopped tracking TCS and other large-cap IT firms closely due to this lack of growth momentum.

While acknowledging the possibility of a short-term 'trading rally' in IT stocks—driven by factors such as rupee depreciation, a favourable base effect, and the realisation of revenues from previously won contracts—Mehta advised against expecting significant long-term gains. He suggested that while the valuations for these companies are 'reasonable', the decline in growth rates tempers their appeal.

From an investment standpoint, his assessment is to remain invested in software services companies to capitalise on a potential bounce in the coming quarters. However, he clarified that he does not view them as 'great long-term growth stories' capable of creating substantial wealth from current levels. At best, he believes these stocks can protect wealth or deliver returns in line with the broader market.