In a sweeping assessment that has sent ripples through the Indian technology sector, global brokerage firm Jefferies has issued a sharply cautious report on Monday, February 23, 2026. The brokerage warned that the “AI-related pain is not over yet,” leading to a significant downgrade for major industry players including Infosys, Tata Consultancy Services (TCS), and four other prominent IT stocks. The most striking takeaway from the report is the warning that in a worst-case scenario involving artificial intelligence disruption, sector valuations could face a further 30% to 65% derating from current levels.
The AI Disruption: A Structural Shift
Jefferies analysts, led by Akshat Agarwal, argue that Artificial Intelligence is not just a cyclical headwind but a structural force that is fundamentally altering the IT business mix. The report suggests that while AI creates new opportunities in consulting and implementation, it is simultaneously shrinking the traditional Application Managed Services segment. This segment currently accounts for 22% to 45% of revenues for large Indian IT firms and is facing “sharp revenue deflation” as AI tools become increasingly sophisticated.
The shift toward advisory-led work is expected to increase revenue cyclicality and necessitate a complete overhaul of operating models and talent strategies. Jefferies notes that such internal transformations are difficult to execute and carry significant execution risks that are not yet fully priced into stock multiples.
Sweeping Downgrades Across Large and Mid-Caps
Reflecting these structural concerns, Jefferies has reset its ratings and slashed target prices by as much as 33%.
| Stock Name | Revised Rating | New Target Price | Old Target Price |
| Infosys | Hold (from Buy) | Rs 1,290 | Rs 1,880 |
| HCLTech | Hold (from Buy) | Rs 1,390 | Rs 1,885 |
| TCS | Underperform (from Hold) | Rs 2,350 | Rs 3,485 |
| LTIMindtree | Underperform (from Hold) | Rs 4,300 | Rs 6,175 |
| Hexaware | Underperform (from Hold) | Rs 460 | Rs 660 |
| Mphasis | Hold (from Buy) | Rs 2,450 | Rs 3,410 |
The brokerage also maintained an Underperform rating on Wipro, lowering its target to Rs 180 from Rs 220.
Valuation Reality Check
The report flags three critical derating triggers that investors can no longer ignore:
- Premium to Global Peers: Indian IT firms currently trade at a 32% PE premium to global giant Accenture, despite having similar growth profiles.
- Growth Mismatch: The sector’s Price-to-Earnings (PE) multiples are similar to the Nifty 50, yet their earnings growth is nearly 50% lower.
- Revenue Projections: Reverse-DCF analysis suggests the market is currently pricing in a 6-14% revenue CAGR for large caps over the next decade. Jefferies finds this optimistic, projecting a much leaner 6% earnings CAGR over FY26–28.
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The Mid-Cap Silver Lining
While the outlook for large-cap “commoditized” service providers remains grim, Jefferies does see a path for agile players. The brokerage expressed a preference for mid-sized IT firms that have the flexibility to pivot faster to AI-led opportunities. Coforge, Sagility, and IKS remain the top picks for the house, with projected earnings growth rates of 19-25% CAGR over the next two years, vastly outperforming the 6% expected for the large-cap basket.
However, for the broader sector, the message is clear: the near-term setup remains skewed to the downside, and current prices may still be reflecting a reality that the AI era is rapidly dismantling.
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