Jefferies has turned cautious on India’s IT providers sector, warning that synthetic intelligence might deliver structural adjustments to enterprise fashions and put stress on valuations, at the same time as IT shares have bounced again this 12 months.
Though IT shares are up round 16% year-to-date, the brokerage believes the risk-reward equation remains to be unfavourable. Jefferies has lower earnings per share estimates by 1–4% and diminished value targets by as a lot as 33%.
The brokerage downgraded Infosys, HCLTech and Mphasis to ‘Maintain’, whereas TCS, LTIMindtree and Hexaware have been moved to ‘Underperform’. Wipro continues to stay within the ‘Underperform’ class. Coforge, Sagility and IKS Well being are its most well-liked picks.
In a be aware titled “P(AI)n Not Over But; Keep Selective”, Jefferies mentioned AI is anticipated to shift income in direction of consulting and implementation work, whereas lowering the share of conventional managed providers.
This transition might improve income volatility and require main adjustments in expertise and working fashions, including execution dangers for IT corporations.
Jefferies identified that whereas third-quarter outcomes led to earnings upgrades for many IT corporations, investor focus has now shifted to the medium- and long-term influence of AI.
The Nifty IT index has fallen about 14% and has underperformed the Nifty 50, reflecting issues that AI-driven effectivity good points might result in pricing stress in core providers.
The brokerage expects software managed providers, which contribute round 22–45% of revenues for big IT corporations, to face deflation as AI instruments enhance.
Whereas the next share of advisory and implementation work might help progress, it might additionally require adjustments in supply fashions and price buildings.
Jefferies estimates present inventory costs suggest income progress of 6–14% for big IT corporations and 9–17% for mid-sized gamers over FY26–36.
Though these assumptions are under historic averages for a number of corporations, the brokerage believes there may be nonetheless room for additional valuation compression.
In its base case, Jefferies sees restricted upside in price-to-earnings multiples for big IT corporations, whereas mid-sized corporations might see higher rerating potential.
In a draw back situation, shares might face additional derating of 30–65% if income progress slows sharply.
General, Jefferies expects sector earnings CAGR of round 6% throughout FY26–28, with Coforge, Sagility and IKS Well being more likely to outperform with progress of 19–25%.
The brokerage mentioned it prefers mid-sized IT corporations, citing their better agility in adapting to AI-led adjustments.
