Infosys, TCS: Jefferies downgrades Indian IT stocks, cuts earnings estimate

Jefferies has downgraded Indian information technology (IT) companies Infosys, HCL Technologies (HCLT) and MphasiS to ‘hold’; LTI MindTree, Tata Consultancy Services (TCS) and Hexaware to ‘underperform’ citing artificial intelligence (AI)-related concerns. Coforge, Sagility and IKS, however, still remain their top picks.

 

The global research and broking house has cut their earnings estimates by 1-4 per cent across IT firms and expects 6 per cent earnings CAGR over FY26-28. Among the lot, expects Coforge, Sagility and IKS to grow faster at 19-25 per cent CAGR during this period driven by higher revenue growth. 

 

 

While the IT firms should remain relevant, Jefferies said, the nature of their client engagements is likely to structurally shift towards advisory and implementation, with application managed services (22-45 per cent of revenues) seeing sharp revenue deflation. The extent and timing of this deflation, it said, are likely to exacerbate as AI tools become better.

 

"The rising share of advisory and implementation engagements would not only increase the cyclicality in revenue growth, but will also demand an overhaul of talent strategy and operating models. Such changes in operating models are not easy to execute and investors must factor in this risk in PE multiples," wrote Akshat Agarwal and Ayush Bansal of Jefferies in a recent note.

 

 

  At the bourses, meanwhile, IT stocks have underperformed in calendar year 2026 (CY26). The Nifty IT index has lost over 15 per cent in CY26 as compared to nearly 2 per cent dip in the Nifty 50 index during this period. 

 

Wipro, Coforge, LTI Mindtree, Persistent Systems, Infosys and TCS have been the top losers that slipped up to 20 per cent, ACE Equity data shows.

 

Earnings impact

 

At the current prices, IT stocks, Jefferies believes, are pricing in revenue CAGR of 6-14 per cent in (INR terms) for large IT firms and 9-17 per cent CAGR for mid-sized IT firms over FY26-36 with terminal growth rates ranging from 4 per cent (Wipro) to 7 per cent (IKS). 

 

These growth rates, it said, are 6-12 per cent lower than the growth rates in FY16-26E for Sagility, Hexaware and IKS, 3 per cent lower than the growth rates in FY16-26E for TCS, Infosys, HCLTech, Coforge, but 1-2 per cent higher versus growth rates in FY16-26E for Wipro and tech Mahindra (TechM). 

 

Maintaining the long-term revenue growth trajectory in line with previous decade is the best case outcome for IT firms going ahead, Jefferies believes. In the worst-case scenario, revenue CAGR over FY26-31 could be 3 per cent lower (15 per cent cumulative deflation), followed by no growth beyond FY31.

 

In the best case, price-earnings (PE) multiples, Jefferies said, could range between 14-22x for large IT firms with Infosys, HCLT and TCS offering around 15 per cent rerating potential, and 23-42x for mid-sized IT firms with Hexaware offering 35-45 per cent rerating potential. 

 

"In the worst case, stocks could derate by another 30-65 per cent with Wipro having the lowest and Coforge having the highest derating potential. Assuming 3 per cent lower growth over FY26-36 and 1 per cent lower terminal growth, PE multiples could still derate by 10-35 per cent for large IT firms and up to 15 per cent for mid-sized IT firms," Agarwal and Bansal wrote.