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The Indian Information Technology sector is facing one of its most challenging phases in recent history, and a newly released Jefferies Report has officially sounded the alarm. As artificial intelligence continues to evolve at breakneck speed, what was once considered a distant macroeconomic headwind has now manifested as a direct, existential threat to traditional IT business models. The global brokerage firm has taken a sharply cautious stance, executing sweeping downgrades across major large-cap Indian IT stocks.[1][2] For investors, tech executives, and industry stakeholders alike, this comprehensive analysis serves as a stark reality check: the AI-induced pain for the Indian IT ecosystem is far from over.
The Catalyst: How Generative AI is Rewriting the Rules
At the heart of the latest Jefferies Report is the rapid advancement of generative AI tools and platforms, particularly those developed by industry powerhouses like Anthropic, OpenAI, and Palantir. For decades, Indian IT giants have thrived on application managed services, a segment that traditionally accounts for roughly 22% to 45% of the total revenues for large-cap firms. These labor-intensive, recurring revenue streams are now squarely in the crosshairs of AI-driven automation.
According to the Jefferies Report, the industry is staring down the barrel of severe revenue deflation in these legacy service lines. As enterprise-grade AI tools become increasingly sophisticated, coding, testing, and maintenance tasks that previously required large offshore teams of engineers can now be automated or streamlined with unprecedented efficiency. The brokerage warns that this structural erosion will likely more than offset any near-term gains from new AI-related consulting opportunities, forcing IT companies to face intense top-line growth pressures over the next one to two years.[3][4]
Sweeping Downgrades: The Heavyweights Take a Hit
The profound structural concerns outlined in the Jefferies Report have triggered a massive reset in ratings and target prices across the board. Highlighting that IT stocks still offer higher downside risk than upside potential, Jefferies downgraded six major Indian IT firms in late February 2026.[1][2][5][6]
Industry heavyweights Infosys and HCLTech were downgraded from “Buy” to “Hold.”[2][7][8] The target price for Infosys was slashed dramatically from ₹1,880 to ₹1,290, with its target price-to-earnings (P/E) multiple compressed from 23x down to 16x.[1][2] Similarly, HCLTech saw its target price reduced from ₹1,885 to ₹1,390.[1][2]
The Jefferies Report was even more bearish on other market leaders. Tata Consultancy Services (TCS), India’s largest IT exporter, was downgraded from “Hold” to “Underperform,” with its price target revised downwards to ₹2,350 from an earlier ₹3,485.[1] LTIMindtree and Hexaware Technologies also suffered downgrades to “Underperform,” while Mphasis was lowered to “Hold.”[2][6][7][8] The brokerage firm systematically lowered its earnings per share (EPS) estimates by 1% to 4% across these firms, predicting a sluggish 6% earnings compound annual growth rate (CAGR) for large-cap IT companies between FY26 and FY28.[2][6]
A Structural Shift: From Managed Services to Consulting
Beyond mere numbers, the Jefferies Report dives deep into the shifting nature of client engagements.[5][6] As artificial intelligence compresses the scale of traditional managed services, the overall IT business mix is expected to pivot heavily toward consulting and implementation.[1][5][6][7][8] While this sounds like a natural technological evolution, it brings a host of new operational risks to the table.
Consulting and advisory roles are inherently more project-based and cyclical than the predictable, multi-year recurring contracts of managed IT services. To survive this transition, Indian IT firms will be forced to completely overhaul their talent acquisition strategies and internal operating models. The requirement to upskill hundreds of thousands of employees to handle complex AI implementations, custom model deployments, and modern data architecture is a monumental and highly capital-intensive task.
In a worst-case disruption scenario modeled within the Jefferies Report, the sector could face a 15% cumulative deflation in revenues over the next five years, followed by stagnant growth beyond FY31.[1] Should this worst-case scenario materialize, Jefferies cautions investors that IT sector valuations could experience an additional 30% to 65% derating from current levels, marking a potential watershed moment for the market capitalizations of these tech behemoths.
Market Reaction and Institutional Outflows
Unsurprisingly, the release of the Jefferies Report sent shockwaves through the global financial markets. In February 2026, the Nifty IT index plummeted dramatically, taking its month-to-date fall to nearly 20%.[6] The massive selloff reflects growing investor anxiety that consensus growth estimates had not fully priced in the reality of AI disruptions.[4] The data backs up this fear; foreign investors have offloaded record amounts of Indian IT stocks as they recalibrate their portfolios in response to the AI revolution.
The Silver Lining: Navigating the AI Frontier
Despite the widespread market gloom and the stark warnings contained within the Jefferies Report, the landscape is not entirely devoid of opportunity. Mid-sized IT firms such as Coforge, Sagility, and IKS remain top picks for Jefferies.[6] These specialized players are expected to grow at a much faster 19% to 25% CAGR, driven by higher revenue growth and nimble market positioning.
Furthermore, the very technology causing this current upheaval also presents a massive long-term runway for those who can successfully adapt. The global market for AI-led business transformation is projected to reach an astounding $300 billion to $400 billion by 2030.[9] Indian IT companies are actively forging strategic partnerships to capture this value. A prime example highlighted recently is the collaboration between Infosys and Anthropic to build tailored AI agents for enterprise clients.[9] There is surging corporate demand for “small language models” trained exclusively on proprietary, in-house corporate data.[9] Indian IT services are perfectly positioned to play the crucial role of integrating, securing, and migrating legacy enterprise systems into these new custom AI frameworks.
The coming years will inevitably separate the agile innovators from the slow-moving legacy operators. Relying on the labor arbitrage playbooks of the past is no longer a viable strategy for India’s technology sector. The industry is currently undergoing a painful but deeply necessary metamorphosis, one that will redefine the global technology services landscape and determine the next generation of digital leaders.
