- CLSA slashes price targets across the board, yet retains ‘outperform’ calls on Infosys, Tech Mahindra, Coforge and Persistent Systems.
- AI is being treated as a productivity boost, not a revenue killer, easing fears of a managed‑services collapse.
- Valuation multiples stay compressed, reflecting investor scepticism on medium‑term growth despite upbeat management commentary.
- Wipro is the lone ‘hold’ as its growth outlook lags peers, creating a potential entry point for contrarian bets.
- Sector‑wide pressure may create a valuation floor, setting the stage for a CY26 macro recovery.
Most investors ignored the fine print. That was a mistake.
Why Infosys' Margin Outlook Defies the AI Fear Factor
CLSA’s latest note emphasizes that AI adoption in Indian IT services is still in its infancy. Clients are integrating generative tools to automate repetitive coding or data‑processing tasks, but they haven’t overhauled existing contracts. Consequently, Infosys’ managed‑services revenues—historically the backbone of its cash flow—remain largely intact. The brokerage trimmed Infosys’ target to ₹1,653, a modest reduction that reflects broader market de‑rating rather than a fundamental shift in earnings trajectory. For investors, the key metric to watch is the operating margin, which has held above 20% for the past three years, signalling pricing power even as AI tools lower internal costs.
Impact of CLSA’s Target Cuts on Your Portfolio Allocation
When a respected research house trims targets across a sector, many portfolios instinctively re‑balance toward perceived safety. CLSA’s approach, however, is nuanced: it retains ‘outperform’ on four large‑cap names while lowering price expectations to align with current valuation multiples (EV/EBITDA around 12‑14× versus 18× a year ago). This creates a “valuation floor” where stocks trade below intrinsic value but above the risk‑adjusted discount rate. Investors can therefore add exposure at a discount, banking on the sector’s anticipated cyclical rebound in CY26.
Sector Trends: AI as a Productivity Lever, Not a Disruption Shock
Across the Indian IT landscape, the AI narrative is being reframed. Rather than a wholesale replacement of traditional services, AI is emerging as an incremental efficiency driver—think automated testing, code‑generation assistants, and predictive maintenance analytics. This mirrors the early‑stage adoption curves seen in the US cloud market a decade ago, where initial hype gave way to steady, revenue‑positive integration. The result? Service‑mix dynamics remain stable, with consulting and managed services still accounting for roughly 55% of total revenue for the top five firms.
Competitor Landscape: How Tata, Adani and Peers React to the AI Debate
Tata Consultancy Services (TCS) kept its ‘outperform’ rating, albeit with a target cut to ₹3,333. The firm’s massive scale and diversified digital portfolio cushion it against short‑term AI volatility. Conversely, Adani’s nascent IT arm, still in beta mode, is unlikely to sway the sector’s direction but highlights the broader trend of non‑IT conglomerates testing AI‑centric models. The real differentiator remains execution speed—companies like Tech Mahindra, with its strong telecom‑AI collaborations, are positioned to capture incremental spend on network automation.
Historical Context: Past Technology Waves and What They Teach Us
When the Y2K scare hit in 1999, Indian IT firms also faced headlines about existential risk. Yet the sector emerged stronger, leveraging the urgency to build robust legacy‑modernisation capabilities. A similar pattern unfolded during the early cloud transition (2008‑2012), where initial cost‑compression fears gave way to higher‑margin SaaS contracts. The AI episode appears to be at a comparable inflection point: a short‑term perception shock followed by a longer‑term productivity uplift.
Technical Definitions: Valuation De‑rating, Managed Services, and EV/EBITDA
Valuation de‑rating refers to the market’s decision to price a company at lower multiples (e.g., price‑to‑earnings, EV/EBITDA) due to perceived risk or lower growth visibility. Managed services are long‑term contracts where a vendor runs a client’s IT infrastructure, providing recurring revenue and high cash‑flow stability. EV/EBITDA (Enterprise Value to Earnings Before Interest, Taxes, Depreciation, and Amortisation) is a common multiple used to compare firm value across industries, less sensitive to capital‑structure differences.
Investor Playbook: Bull vs. Bear Cases for Indian IT in 2024‑2026
Bull Case: AI adoption accelerates, boosting operating margins by 1‑2% per annum. CY26 macro recovery lifts overall IT spend by 8‑10%, driving earnings growth above 12% YoY. Valuation multiples re‑price to pre‑AI‑fear levels (EV/EBITDA 16‑18×), delivering upside of 25‑30% for top‑pick stocks.
Bear Case: Persistent macro headwinds delay corporate capex, keeping IT spend flat. AI implementation stalls, leading to slower margin expansion. Valuation multiples stay compressed, with EV/EBITDA under 12×, capping upside and potentially prompting further target cuts.
For disciplined investors, the sweet spot lies in selective accumulation of CLSA’s high‑conviction names—Coforge, Persistent Systems, and Tech Mahindra—while monitoring margin trajectories and macro data releases. The sector’s resilience, coupled with a clear‑cut AI narrative, suggests the current de‑rating is a tactical entry rather than a fundamental red flag.