IT stocks have witnessed heightened volatility in recent trading sessions, as investors reassess the sector’s outlook amid mounting concerns over the disruptive impact of artificial intelligence, potential pricing pressure in core services and stretched valuations.
Tech stocks extended their fall on Monday as well, dragging the Nifty IT index nearly 2 per cent lower in intraday trade, as investors reacted to cautious commentary from global brokerage Jefferies on the sector’s medium- to long-term outlook.
KEY HIGHLIGHTS
- Nifty IT fell nearly 2 per cent intraday, with all constituents trading in the red.
- Jefferies downgraded six IT stocks and cut price targets.
- Brokerage warns AI could compress margins and disrupt traditional services.
- Coforge, Sagility and IKS Health named as preferred picks despite sector caution.
All constituents of the index traded in negative territory, with Coforge, Mphasis, Wipro and Infosys among the top losers in early deals. At 11.16 am, the Nifty IT index was at 31,546.80, down over 1 per cent, after moving in a range of 31,416.55 to 32,051.70 during the session.
Jefferies has turned more circumspect on India’s IT services space, warning that artificial intelligence could structurally alter business models and compress valuations, even as the sector has seen a rebound this year. Despite a roughly 16 per cent rise in IT stocks year-to-date, the brokerage believes the risk-reward remains unfavourable at current levels.
In a note titled “P(AI)n Not Over Yet; Stay Selective,” Jefferies cut earnings per share estimates for its coverage universe by 1–4 per cent and slashed price targets by as much as 33 per cent.
Downgrades and preferred picks
It downgraded Infosys, HCLTech and Mphasis to “hold,” and moved TCS, LTIMindtree and Hexaware to “underperform.” Wipro continues to be rated “underperform.” The brokerage identified Coforge, Sagility and IKS Health as its preferred picks, citing relatively better positioning and growth prospects.
According to Jefferies, AI adoption is likely to shift the revenue mix towards consulting and implementation services while shrinking traditional managed services. Such a shift could increase revenue cyclicality and require significant changes in talent pools and operating models, heightening execution risks for companies.
The brokerage noted that while third-quarter results prompted earnings upgrades for most IT firms, investor focus has shifted to the medium- to long-term implications of AI-led disruption. The Nifty IT index has fallen about 14 per cent in recent months and underperformed the broader Nifty 50, reflecting concerns that technology-driven efficiency gains may exert pressure on pricing in core service lines.
Jefferies expects application managed services, which account for roughly 22–45 per cent of revenues for large IT companies, to face deflationary pressures as AI tools improve productivity and reduce manual effort. Although a greater share of advisory and implementation work may support top-line growth, it could also necessitate changes in delivery strategy and cost structures.
On valuations, the brokerage estimated that current stock prices imply revenue compound annual growth rates of 6–14 per cent for large IT firms and 9–17 per cent for mid-sized players over FY26–36. While these projections are below historical growth rates for several companies, Jefferies believes there remains scope for further valuation compression.
In its base case, price-to-earnings multiples for large IT firms may see limited upside, while mid-sized players could offer relatively stronger rerating potential. However, in a downside scenario where revenue growth slows materially, stocks could face additional derating of 30–65 per cent, the brokerage cautioned.
Published on February 23, 2026