Jefferies has turned cautious on India’s IT services sector, warning that artificial intelligence could bring structural changes to business models and put pressure on valuations, even as IT stocks have bounced back this year.
Although IT stocks are up around 16% year-to-date, the brokerage believes the risk-reward equation is still unfavourable. Jefferies has cut earnings per share estimates by 1–4% and reduced price targets by as much as 33%.
The brokerage downgraded Infosys, HCLTech and Mphasis to ‘Hold’, while TCS, LTIMindtree and Hexaware were moved to ‘Underperform’. Wipro continues to remain in the ‘Underperform’ category. Coforge, Sagility and IKS Health are its preferred picks.
In a note titled “P(AI)n Not Over Yet; Stay Selective”, Jefferies said AI is expected to shift revenue towards consulting and implementation work, while reducing the share of traditional managed services.
This transition could increase revenue volatility and require major changes in talent and operating models, adding execution risks for IT companies.
Jefferies pointed out that while third-quarter results led to earnings upgrades for most IT firms, investor focus has now shifted to the medium- and long-term impact of AI.
The Nifty IT index has fallen about 14% and has underperformed the Nifty 50, reflecting concerns that AI-driven efficiency gains could lead to pricing pressure in core services.
The brokerage expects application managed services, which contribute around 22–45% of revenues for large IT firms, to face deflation as AI tools improve.
While a higher share of advisory and implementation work may support growth, it could also require changes in delivery models and cost structures.
Jefferies estimates current stock prices imply revenue growth of 6–14% for large IT firms and 9–17% for mid-sized players over FY26–36.
Although these assumptions are below historical averages for several companies, the brokerage believes there is still room for further valuation compression.
In its base case, Jefferies sees limited upside in price-to-earnings multiples for large IT firms, while mid-sized companies could see better rerating potential.
In a downside scenario, stocks could face further derating of 30–65% if revenue growth slows sharply.
Overall, Jefferies expects sector earnings CAGR of around 6% during FY26–28, with Coforge, Sagility and IKS Health likely to outperform with growth of 19–25%.
The brokerage said it prefers mid-sized IT firms, citing their greater agility in adapting to AI-led changes.
