- CLSA has downgraded TCS, Infosys, and Tech Mahindra to Hold from Outperform, while cutting Wipro and Mphasis to Underperform.
- Ongoing technology changes are creating both potential winners and losers, according to CLSA.
- CLSA expects AI to become one-third of TCS, Infosys, and HCLTech's overall revenue only by financial year 2031.
- Larger IT service firms are facing the AI deflation impact and macro headwinds, according to CLSA.
- CLSA estimates that growth in AI-related volumes could eventually supersede the deflationary impact by FY30.
- CLSA raised its target price for TCS to ₹2,326 from ₹2,165 despite cutting the rating to Hold.
- Infosys' target price was similarly raised to ₹1,147 from ₹1,109 while downgrading the stock to Hold.
CLSA has downgraded five major Indian IT firms, including TCS and Infosys, to Hold, citing AI deflation and macroeconomic headwinds. The brokerage noted that larger IT companies are struggling with legacy service impacts and uncertain technology spending, while mid-tier firms are better positioned.1
CLSA's report highlights that AI is expected to contribute only one-third of TCS and Infosys's revenue by FY31, with current figures at 10% and 9%, respectively. The firm anticipates growth rates of 6.1% for TCS and 5.6% for Infosys by FY31.
The downgrade reflects a challenging environment for large IT firms, as AI threatens to drive deflation in legacy services while macroeconomic uncertainties persist. CLSA's preference for mid-tier IT vendors stems from their resilience in this landscape, maintaining an "outperform" rating on companies like Coforge and Persistent Systems.
Despite the downgrade, CLSA raised its target price for TCS to Rs 2,326 from Rs 2,165 and for Infosys to Rs 1,147 from Rs 1,109. The Nifty IT index has seen a decline of 3.94% over the last three trading sessions, with major players like HCLTech and TCS also experiencing significant losses.6
Overall, CLSA's analysis indicates a long gestation period for AI benefits, with limited near-term upside for large IT companies.
“CLSA's downgrade reflects a cautious outlook for large IT firms, as it anticipates AI to contribute only one-third of TCS and Infosys's revenue by FY31. The brokerage maintains a positive stance on mid-tier IT stocks like Coforge and Persistent Systems, which are better positioned to navigate current market challenges.”
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