Jefferies warns structural shift will shrink managed services and increase cyclicality
India’s information technology sector is experiencing its worst selloff in years, with the Nifty IT index plunging over 21% since January 1, 2026, erasing over Rs 1 lakh crore in market capitalization from the top five IT stocks alone. What started as concerns about growth moderation has morphed into an existential crisis as artificial intelligence tools threaten to automate the very services Indian IT giants have built their empires upon.
The carnage is broad-based and relentless. Tata Consultancy Services has crashed 17% in February alone, hitting Rs 2,676—well below its 52-week high of Rs 3,763. Infosys has plunged into bear market territory with a 23% monthly decline. HCL Tech, Wipro, Persistent Systems, and LTIMindtree have all recorded double-digit percentage falls, with the sector bleeding value day after day as global technology weakness compounds domestic concerns.
The Numbers Tell a Brutal Story
The Nifty IT index, which tracks the performance of India’s top 10 IT companies, currently trades around 31,550—down from its 52-week high of 40,301 reached in late 2025. That represents a 21.7% collapse, with the index now trading near its 52-week low of 30,919. Over the past 12 months, the index has delivered negative 23% returns, turning what was once a defensive sector into a value destroyer.
On February 24 alone, IT stocks witnessed huge selling. TCS fell 3.2% to Rs 2,590, Infosys dropped 3.5% to Rs 1,282, HCL Tech declined 3.9% to Rs 1,370, and Wipro slid 2.1% to Rs 201. The combined market capitalization of the top five IT stocks—TCS, Infosys, HCL Tech, Wipro, and Tech Mahindra—fell to Rs 21.79 lakh crore from Rs 22.63 lakh crore just a day earlier, erasing Rs 84,448 crore in a single session.
The past month has been particularly devastating. Coforge and Infosys have each nosedived approximately 23%, Persistent Systems fell 21.2%, and LTIMindtree dropped substantial value. Even sector heavyweight TCS, with its Rs 9.38 lakh crore market cap, couldn’t escape—the stock hit its 52-week low of Rs 2,797 on February 12 before recovering marginally.
When will the Selloff end?
Leading global brokerage Jefferies delivered a devastating assessment of the sector, downgrading six IT stocks and slashing target prices by up to 33% in a note titled “P(AI)n Not Over Yet; Stay Selective.” The brokerage moved Infosys, HCL Tech and Mphasis from Buy to Hold, while downgrading TCS, LTIMindtree and Hexaware from Hold to Underperform.
The core thesis is chilling for investors hoping for a quick recovery. “AI may structurally change IT business mix towards consulting/implementation while shrinking managed services. This would not only increase cyclicality but also require a change in talent/operating model—thus adding risks,” Jefferies stated, warning that “despite their 16% fall YTD, stocks still offer higher downside than upside.”
The brokerage’s analysis suggests application managed services—which account for 22-45% of revenues for most IT firms—face sharp revenue deflation as AI tools automate routine maintenance, monitoring, and support tasks. This isn’t a temporary headwind but a permanent structural shift that will force companies to overhaul their entire business models.
“Rising share of advisory and implementation engagements would not only increase the cyclicality in revenue growth, but will also demand an overhaul of talent strategy and operating models. Such changes in operating models are not easy to execute and investors must factor in this risk in PE multiples,” Jefferies warned.
What Stocks Are Actually Pricing In
Jefferies performed detailed reverse DCF calculations to understand what growth rates current stock prices imply. The findings are sobering. “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%,” the brokerage stated.
These implied growth rates represent dramatic slowdowns from historical performance. For companies like Sagility, Hexaware and IKS, the current stock prices assume growth rates 6-12% lower than what they achieved during FY16-26. For stalwarts like TCS, Infosys, HCL Tech and Coforge, the implicit growth rates are 3% lower than historical norms.
Even at these depressed levels, Jefferies sees more downside than upside. The brokerage laid out three scenarios ranging from best case to worst case. In the best case—where IT firms somehow maintain their long-term revenue growth trajectory despite AI disruption—stocks like Infosys, HCL Tech and TCS could rerate by approximately 15%, while mid-tier players like Hexaware could see 35-45% upside.
But the worst case is terrifying. Assuming 3% lower revenue CAGR over FY26-31 (implying 15% cumulative revenue deflation) followed by zero growth beyond FY31, stocks could derate by another 30-65%, with Coforge facing the highest derating potential and Wipro the lowest.
The Anthropic Shock That Changed Everything
The selloff accelerated dramatically in mid-February when Anthropic, the AI company behind Claude, announced tools that directly threaten core Indian IT services revenue streams. Claude Code, a tool that can automate the exploration and analysis phases of COBOL modernization, struck fear into investors. COBOL handles an estimated 95% of ATM transactions in the United States—exactly the kind of legacy system modernization work that Indian IT services companies have built massive practices around.
On February 20, Anthropic announced another tool that scans codebases for security vulnerabilities and suggests targeted software patches. The implications were immediate—cybersecurity services, application maintenance, code review, and testing are all revenue streams worth billions of dollars annually to Indian IT firms. If AI can automate these tasks at a fraction of the cost, what happens to the headcount-based business model?
Valuation: Cheap or Value Trap?
The Nifty IT index now trades at a P/E multiple of 22.96, down from over 30x during the 2025 highs. By historical standards spanning the last 15 years, the sector is in “very cheap” valuation territory.
But Jefferies argues these aren’t bargain valuations—they’re appropriate discounts for structurally challenged businesses. The brokerage cut earnings estimates by 1-4% and now expects just 6% earnings CAGR over FY26-28, with only Coforge, Sagility and IKS expected to grow faster at 19-25% CAGR driven by differentiated positioning.
The brokerage’s estimates are 3-14% below consensus, suggesting further disappointment ahead as other analysts capitulate. More concerning, Indian IT stocks trade at a 32% PE premium to Accenture despite similar growth prospects, and at similar multiples to the broader Nifty despite 50% lower earnings growth—both metrics Jefferies identifies as key derating triggers.
Jefferies is unambiguous in its view: stay selective. The brokerage maintains Buy ratings only on Coforge, Sagility and IKS—companies with differentiated business models less exposed to application managed services deflation. For the large-cap bellwethers that dominate index weights, the message is hold or sell, not accumulate.
The AI disruption fears may prove overblown, but they’re not unfounded. Indian IT’s business model—selling time and manpower at scale—is genuinely vulnerable to automation in ways previous technology shifts weren’t. The sector will stay volatile till AI continues to get better.
