Global brokerage Jefferies has upgraded the Indian IT services sector to neutral, citing a cooling in the AI trade and a 25% year-to-date decline. Investors are now looking at more attractive valuations after major IT stocks fell between 35% and 50% from their recent peaks.
Detailed Coverage
The Indian IT services sector has undergone a major price correction, with the industry declining by 25% year-to-date. Prominent companies such as Tata Consultancy Services, Infosys, HCLTech, and Wipro have faced significant selling pressure, with their stock prices dropping between 35% and 50% from their peaks recorded over the last two years. In response to these valuation shifts, brokerage firm Jefferies has upgraded the sector rating from underweight to neutral.
Valuation and Growth Outlook
Jefferies noted that the sector has been heavily impacted by concerns regarding the disruptive impact of artificial intelligence. However, as the initial market momentum surrounding AI trades has cooled, the firm believes the current valuations offer a tactical opportunity. Major Indian IT companies are now trading at price-to-earnings multiples between 13 and 17 times. While these valuations appear more reasonable compared to previous highs, revenue growth expectations for the fiscal years 2026 through 2028 remain modest, projected in the low to mid-single digits.
Investor Sentiment and Portfolio Shifts
Recent discussions with over 50 foreign portfolio investors have indicated a more optimistic sentiment toward India, as investors seek alternatives to the cooling global AI trade. This shift in sentiment is further supported by foreign institutional flows turning positive, driven by macroeconomic data that has outperformed market expectations.
To reflect this neutral stance, Jefferies has adjusted its model portfolio by including Infosys and increasing its allocation to Coforge. To balance these additions, the firm reduced its holdings in the power, real estate, and hospital sectors. Despite these changes, the firm maintains an overweight position in lenders, power, and industrial companies, signaling that the move into IT is a tactical adjustment rather than a wholesale sector rotation.
What Investors Should Track
As the sector attempts a tactical rebound, the primary monitorable for investors remains the ability of IT firms to convert their deal pipelines into revenue growth. While market reactions to negative news have softened, indicating a potential bottom, actual financial performance in the coming quarters will be critical to confirming if the sector can sustain this recovery. Investors should watch for management commentary on demand trends for discretionary spending and whether the mid-single-digit growth projections hold steady as the fiscal year progresses.