The Indian IT services sector faces an extended period of weak growth as artificial intelligence-led disruption and geopolitical uncertainty continue to weigh on demand, according to JPMorgan's latest research report. The brokerage warns that the IT services industry has been stuck at 2-3% revenue growth over the last three years and expects further headwinds to growth over the next two years as AI deflation remains in its second year. JPMorgan has moderated its medium-to-long-term growth estimates and now does not expect large-caps to hit mid-single-digit growth and hover around 3-4% revenue growth. The firm noted that positive inflection is some time away, suggesting the industry growth funk could last longer than expected, with recovery extending beyond FY29 to FY30, making the near-term growth curve look more 'L'-shaped. The brokerage has reduced first-quarter revenue growth estimates across the board and expects FY27 revenue guidance to be lowered as the "usual 1H strength is unlikely to play out this time."
The Indian IT sector witnessed contrasting brokerage recommendations on Wednesday, June 24, with JPMorgan downgrading three major stocks while Axis Capital upgraded eight providers. JPMorgan downgraded HCLTech Ltd., Wipro Ltd., and Tata Technologies Ltd. from neutral to underweight rating, with HCLTech's target reduced from ₹1,370 to ₹1,000, Wipro's target lowered from ₹200 to ₹160, and Tata Tech's target decreased from ₹560 to ₹540. In a separate note, Axis Capital upgraded eight IT services providers including TCS, Infosys, HCLTech, LTM, Persistent Systems, Coforge, Hexaware Tech, and Zensar Technologies. The brokerage also downgraded Wipro to 'reduce' from 'add' and Tech Mahindra to 'sell' from 'add', while maintaining its 'buy' rating on Mphasis but downgrading it to 'sell' citing concerns about upfront cash payments to customers. JPMorgan has cut price-to-earnings (P/E) multiples by 10-25% across the sector, arguing that current valuations are justified as "structural growth is stuck at below 5% now vs. 7-8% earlier."
According to JPMorgan's latest analysis, the sector faces an uncertain demand environment due to an unprecedented combination of technology and business cycle headwinds. The report noted that enterprises face FUD (fear, uncertainty, doubt) from changing tech and geopolitics, with tech services budgets crowded out from spending on AI tokens and cloud keeping industry growth recovery prospects uncertain. Checks indicated delays in deal ramp-ups and signings due to continued client indecision from geopolitical uncertainty and sharp AI changes, with weakness likely to bleed into 2QFY27. JPMorgan reiterated that the sector remains in the first phase of its three-stage AI adoption model -- Deflation, where AI-led productivity gains in legacy/maintenance-heavy areas... are not entirely compensated by new AI services. The firm emphasized that growth acceleration is unlikely even for mid-cap firms over the medium term, stating that "until we see AI inflation becoming a tailwind, we would prefer to be cautious on the pace of growth recovery, as well as structural growth for the industry."
As reported by CNBC TV18, JPMorgan has implemented significant price target cuts across the downgraded stocks. The reverse discounted cash flow (DCF) analysis led to P/E multiple cuts by 10-25% across the board. The brokerage noted that current valuations, which trade below pre-COVID-19 averages... are justified, given that structural growth is stuck at below 5% now vs. 7-8% earlier. Despite the bearish sector outlook, JPMorgan maintains selective preferences within the IT sector, with top overweight recommendations including TCS, Infosys, Tech Mahindra, Coforge, Persistent Systems, and Sagility India, which it believes are better positioned to navigate the evolving demand landscape. The brokerage no longer expects large IT firms to return to their "long-term average growth of 7-8% in the medium term," instead forecasting growth to stay below 3-4% for the foreseeable future. For valuations to improve, JPMorgan said it would need to "see revenue growth accelerating where there is less visibility and confidence."
The brokerage actions have significantly impacted stock performance across the sector. HCLTech shares ended 2% lower at ₹1,108 per share in the previous session, with the stock declining 5% in the past month and 32.2% year-to-date. Wipro shares closed 3.2% lower at ₹174.39, having fallen 15.7% in the past month and 34.8% year-to-date. Tata Tech shares ended 1.1% higher at ₹760.1, though it has still risen 12.2% in the past month and 18% year-to-date. Among the upgraded stocks, Coforge emerged as the top performer with Axis Capital setting a ₹2,140 price target, offering 63% upside potential. Information technology stocks traded mixed on June 24, with the Nifty IT index rising 0.7% in early trade, outperforming the broader Nifty 50's 0.13% gain. Tech Mahindra climbed 2.6% to emerge among the top gainers, while Infosys gained 1.3% and TCS advanced 0.6%. However, HCLTech and Wipro were among the top Nifty losers after JPMorgan's downgrades.
