IT shares declined for fourth straight day on February 23 with the latest negative trigger being Jefferies downgrading six IT shares amid concerns over artificial intelligence. In late morning trade, the sectoral index was trading 1.5% lower.
IT stocks fell after the global brokerage Jefferies downgraded them saying that there are risks as the industry requires a change in operating model. Artificial intelligence may structurally change the IT business mix towards consulting and implementation while shrinking managed services, Jefferies said.
Among information technology stocks, Wipro fell nearly 3% and was worst hit in the index. Infosys, Tech Mahindra, and HCL Technologies fell 1-2%.
Jefferies wrote in its note that AI may structurally change the business mix of IT services companies towards consulting and implementation, while shrinking the portion of managed services. This would therefore, not only increase the cyclicality, but also require a change in talent and operating models, thereby adding to the risks.
Jefferies downgraded Infosys to ‘hold’ and slashed target price by 31% to Rs 1,290. The brokerage downgraded HCL Tech to ‘hold’ and cut target price by 26% to Rs 1,390.
The brokerage added that despite these stocks falling up to 16% on a year-to-date basis, they still offer a higher downside potential compared to upside.
“Our calculations suggest that at CMP, stocks are pricing in INR revenue CAGR of 6-14% for large IT firms and 9-17% CAGR for mid-sized IT firms over FY26-36 with terminal growth rates ranging from 4% (Wipro) to 7% (IKS). These growth rates are 6-12% lower than the growth rates in FY16-26E for Sagility, Hexaware and IKS, 3% lower than the growth rates in FY16-26E for TCS, Infosys, HCLTech, Coforge, but 1-2% higher vs. growth rates in FY16-26E for Wipro and TechM,” said Jefferies.
Tata Consultancy Services has been downgraded to ‘underperform’ and its target price has been trimmed by 33% to Rs 2,350. Jefferies has downgraded LTIMindtree and Hexaware Technologies to ‘underperform’ and cut their target price by 30% each to Rs 4,300 and Rs 460, respectively. Jefferies has also downgraded Mphasis to ‘hold’ and trimmed its target price by 28% to Rs 2,450.
Jefferies prefers Coforge, Sagility, and IKS Health as top picks in the IT space, according to CNBC’s report.
The sharp decline in IT stocks began earlier this month amid concerns that artificial intelligence can intensify competition after Anthropic’s launch of a legal AI tool for its Claude AI chatbot. Investors remained concerned that AI was creating more competition for software makers.