Jefferies Warns 'P(AI)n Not Over Yet', Cuts Ratings on Six IT Stocks

On February 23, 2026, Jefferies, a prominent financial services company, expressed caution regarding India’s IT services sector. The brokerage issued a warning about the potential structural changes that artificial intelligence (AI) could bring to business models, which may put pressure on valuations. This comes despite a notable recovery in IT stocks, which have risen approximately 16% year-to-date.

Market Overview

While the rebound in IT stocks is encouraging, Jefferies believes that the risk-reward equation remains unfavorable. The brokerage has revised its earnings per share (EPS) estimates downward by 1-4% and has slashed price targets for several major IT firms by as much as 33%.

Downgraded Stocks

The companies affected by this downgrade include:

• Infosys – downgraded to ‘Hold’
• HCLTech – downgraded to ‘Hold’
• Mphasis – downgraded to ‘Hold’
• Tata Consultancy Services (TCS) – moved to ‘Underperform’
• LTIMindtree – moved to ‘Underperform’
• Hexaware – moved to ‘Underperform’
• Wipro – remains in the ‘Underperform’ category

Preferred Picks

Jefferies has identified a few companies as its preferred picks in the current market scenario:

• Coforge
• Sagility
• IKS Health

Impact of AI on IT Services

In a detailed note titled “P(AI)n Not Over Yet; Stay Selective,” Jefferies discussed the anticipated impact of AI on the IT services landscape. The brokerage noted that AI is likely to shift revenue streams towards consulting and implementation services while reducing the share of traditional managed services. This transition could lead to increased revenue volatility and necessitate significant changes in talent acquisition and operational models, thereby introducing execution risks for IT companies.

Market Performance and Investor Focus

Despite third-quarter results leading to earnings upgrades for most IT firms, investor focus is now shifting towards the medium- and long-term implications of AI. The Nifty IT index has experienced a decline of about 14%, underperforming the Nifty 50 index. This underperformance reflects concerns that efficiency gains driven by AI could lead to pricing pressures in core services.

Revenue Projections

Jefferies estimates that application managed services, which account for approximately 22-45% of revenues for large IT firms, may face deflation as AI tools become more sophisticated. While an increased share of advisory and implementation work could bolster growth, it may also require substantial adjustments in delivery models and cost structures.

Valuation and Growth Expectations

The brokerage anticipates that current stock prices imply revenue growth of 6-14% for large IT firms and 9-17% for mid-sized players over the fiscal years 2026 to 2036. Although these projections fall below historical averages for several companies, Jefferies believes there remains potential for further valuation compression.

Future Outlook

In its base case scenario, Jefferies predicts limited upside in price-to-earnings multiples for large IT firms, while mid-sized companies might experience better re-rating potential. In a downside scenario, stocks could face a derating of 30-65% if revenue growth slows significantly. Overall, Jefferies expects sector earnings to grow at a compound annual growth rate (CAGR) of around 6% during FY26-28, with Coforge, Sagility, and IKS Health likely to outperform with growth rates between 19-25%.

Conclusion

Jefferies’ analysis highlights the evolving landscape of the IT services sector in India, driven by advancements in AI. The brokerage’s cautious stance reflects broader concerns about the sustainability of growth and profitability in a rapidly changing environment. Investors are advised to remain selective and consider the potential risks associated with these shifts.

Frequently Asked Questions

Note: The information provided in this article is based on the latest analysis from Jefferies and is intended for informational purposes only.