Kotak Institutional Equities has warned that generative artificial intelligence could lead to revenue deflation across the IT services sector over the coming years, as automation and productivity gains reduce the demand for traditional outsourcing services.
The brokerage said it has baked in higher GenAI-led revenue deflation for FY27–FY28, while noting that the transmission of rising enterprise technology spending to IT services providers has remained weak, keeping overall industry growth moderate.
Kotak has also raised the cost of equity for IT services companies by 50–100 basis points to reflect higher disruption risks from emerging technologies. As a result, the brokerage has reduced fair value estimates across its coverage universe by 15–28 per cent, while cutting earnings per share estimates by around 1–3 per cent.
Among large-cap IT companies, Kotak continues to prefer Infosys, Tata Consultancy Services and Tech Mahindra.
The brokerage has maintained a buy rating on Tata Consultancy Services with a revised target price of ₹3,090 per share, lowered from ₹3,675 earlier. It has also maintained a buy rating on Infosys with a revised target price of ₹1,530 per share, compared with ₹1,900 previously.
For Tech Mahindra, Kotak has retained a buy rating with the target price reduced to ₹1,615 per share from ₹2,000 earlier.
Kotak remains cautious on certain companies within the sector. It has maintained a sell rating on Wipro with a revised target price of ₹190 per share, while HCLTech has been assigned a reduce rating with the target price cut to ₹1,425 per share.
Among mid-tier companies, the brokerage prefers Coforge and Hexaware Technologies. Kotak has maintained a buy rating on Coforge, though the target price has been reduced to ₹1,620 from ₹2,250 earlier.
Meanwhile, the brokerage has downgraded Persistent Systems to reduce from sell, while cutting its target price to ₹4,615 per share from ₹5,900 earlier.
Despite near-term challenges, Kotak said the long-term relevance of IT services remains intact, and its terminal growth assumptions for the sector remain unchanged.
Disclaimer: The views and investment tips expressed above are those of the brokerage and do not represent the views of this publication. This article is for informational purposes only and does not constitute investment advice.