Up to 65% derating possible! Jefferies downgrades Infosys, TCS, 4 other IT stocks

Warning that artificial intelligence-related pain is not over yet, global brokerage firm Jefferies has turned sharply cautious on Indian IT stocks and downgraded Infosys, Tata Consultancy Services (TCS), HCL Tech, Mphasis, LTIMindtree and Hexaware. It also cautioned investors that, in the worst-case disruption scenario, sector valuations could see another 30–65% derating from current levels.

"AI may structurally change IT business mix towards consulting/implementation while shrinking managed services. This would not only increase cyclicality but also require a change in talent/operating model, thus adding risks. Despite their 16% fall YTD, stocks still offer higher downside than upside," Jefferies analysts, including Akshat Agarwal, said in a note.

The brokerage notes that application managed services, which account for 22–45% of revenues for large Indian IT firms, face sharp revenue deflation, with the “extent and timing of this deflation… likely to exacerbate as AI tools become better”.


Its reverse-DCF analysis suggests 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 IT firms over FY26–36” with terminal growth assumptions of 4–7%, which are already 3–12 percentage points lower than the FY16–26 trajectory for most.

The house lays out three long-term scenarios to frame valuation risk. In the best case, there is no AI impact on long-term growth and revenue growth stays in line with the last decade.

In the worst case, Jefferies models 3% lower revenue CAGR over FY26–31 (15% cumulative deflation) followed by no growth beyond FY31, implying that IT stocks “could derate by another 30–65%” from current PE multiples, with “Wipro having the lowest and Coforge having the highest derating potential”.

Even under a mid-case where growth is 3% lower through FY36 and terminal growth trimmed by 1 percentage point, it sees scope for 10–35% multiple compression for large caps and up to 15% for midcaps.

These structural concerns have triggered a sweeping reset in Jefferies’ ratings and targets. Infosys and HCLTech have been cut from “Buy” to “Hold”, with their target prices slashed to Rs 1,290 (from Rs 1,880) and Rs 1,390 (from Rs 1,885), respectively, as target PE multiples are compressed from 23x to 16x for Infosys and from 24x to 18x for HCLTech.

TCS, LTIMindtree and Hexaware have been downgraded to “Underperform” (U-PF) from “Hold”, with TCS now at Rs 2,350 (from Rs 3,485), LTIMindtree at Rs 4,300 (from Rs 6,175) and Hexaware at Rs 460 (from Rs 660). Mphasis has been cut to “Hold” from “Buy” with its target reduced to Rs 2,450 from Rs 3,410, while Wipro remains “Underperform” with a lower target of Rs 180 versus Rs 220 earlier.

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Jefferies says it has cut earnings estimates by 1–4% and expects 6% earnings CAGR over FY26–28 for the large-cap IT basket, leaving its EPS forecasts 3–14% below consensus. It flags three key derating triggers: “risks to consensus estimates, sharp 32% PE premium to Accenture despite similar growth, and similar PE vs Nifty despite 50% lower earnings growth”. Nifty IT, it points out, trades at around 20x one-year forward PE, below its 10-year average of 21.4x but still at a valuation premium to the Nifty that “needs to reduce further to factor in lower earnings growth vs Nifty”.

While turning defensive on the big names, the brokerage remains selectively constructive on faster-growing mid-sized IT and BPO players.

“We prefer mid-sized IT firms as they should grow faster due to better ability to pivot faster to new opportunities. Coforge, Sagility and IKS are our picks,” Jefferies says, projecting 19–25% EPS CAGR for these names over FY26–28 compared with 6% for the large-cap coverage. Even so, it cautions that the near-term set-up for the sector remains skewed to risk as IT stocks offer more downside than upside at current prices.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)