Indian IT stocks decline as Jefferies warns AI risks persist
What's the story
Indian IT stocks slid as much as 2.5% on Monday following a sector-wide downgrade by global investment firm Jefferies. The brokerage warned that the disruption caused by AI is still a significant headwind for the industry. The move comes amid fears of a potential 30-65% derating in sector valuations due to AI. Jefferies' analysts, led by Akshat Agarwal, highlighted structural risks to growth and margins in their note.
Market impact
AI's impact on IT services companies
Jefferies's note warned that AI could structurally alter the business mix of IT services companies toward consulting/implementation while shrinking managed services. This shift would not only increase cyclicality but also necessitate changes in talent and operating models, thereby adding more risks. The firm added that despite falling up to 16% year-to-date, these stocks still offer higher downside potential than upside.
Revenue forecast
Valuation risks outlined by Jefferies
Jefferies' reverse-DCF analysis shows that at current prices, the market is factoring in rupee revenue CAGRs of 6-14% for large IT firms and 9-17% CAGR for mid-sized ones over FY26-36. The brokerage has laid out three long-term scenarios to frame valuation risk. In the worst-case scenario, they model a 3% lower revenue CAGR over FY26-31 (15% cumulative deflation) followed by no growth beyond FY31.
Rating changes
Target price cuts for major IT firms
Jefferies has downgraded Infosys and HCLTech from "Buy" to "Hold," slashing their target prices to ₹1,290 (from ₹1,880) and ₹1,390 (from ₹1,885), respectively. The firm has also downgraded TCS, LTIMindtree, and Hexaware to "Underperform" (U-PF) from "Hold." Their new targets are TCS at ₹2,350 (from ₹3,485), LTIMindtree at ₹4,300 (from ₹6,175), and Hexaware at ₹460 (from ₹660).
Target adjustments
Mphasis and Wipro also face downgrades
Mphasis has been downgraded to "Hold" from "Buy," with its target price cut to ₹2,450 from ₹3,410. Meanwhile, Wipro continues to be an "Underperformer" with a revised target of ₹180 against the previous ₹220.