JP Morgan Cuts Indian IT Sector Targets for FY26 on AI Concerns

A Cautious Outlook for India's IT Sector

Global brokerage firm JP Morgan has released a cautious preview for India's Information Technology (IT) sector ahead of the fourth-quarter earnings for the financial year 2026. The firm anticipates a challenging period, citing concerns over artificial intelligence-driven pricing pressures, macroeconomic uncertainties, and a slower-than-expected recovery in demand. This sentiment is reflected in the market's performance, with the Nifty IT index declining by 25% so far in 2026, a stark contrast to the Nifty50's 12% correction.

The Specter of 'AI Compression'

According to JP Morgan, the upcoming revenue guidance for FY27 will be the most critical factor for the sector, a level of importance not seen in nearly eight years. The focus on guidance stems from widespread investor concerns about 'AI compression'—the potential for artificial intelligence to deflate pricing for traditional IT services, thereby impacting revenues and margins. Brokerages like Jefferies share this view, highlighting that while generative AI presents long-term opportunities, near-term deals are often small and margin-dilutive. Any indication of growth acceleration in the guidance could be pivotal in restoring investor confidence.

Q4FY26 Performance Projections

For the quarter ending March 2026, JP Morgan expects a mixed but generally soft performance. While the quarter may be relatively healthy, selective headwinds from geopolitical issues and AI-related disruptions have impacted deal closures and ramp-ups. In constant currency terms, Tata Consultancy Services (TCS) is projected to post a modest 0.6% quarter-on-quarter growth. In contrast, other large-cap firms are expected to see declines, with Infosys' revenue potentially falling by 0.7%, HCL Technologies by 1.6%, and Wipro by 1.3%.

Mid-Caps to Lead the Growth Pack

While large-cap companies face headwinds, mid-cap IT firms are expected to show stronger growth in Q4FY26. Tata Technologies is projected to lead with a 4.4% quarter-on-quarter growth, followed by Persistent Systems at 4.0% and Mphasis at 2.0%. Other mid-tier players like Tata Elxsi and Cyient are also expected to report positive growth of 1.5% and 1.0%, respectively. This divergence highlights a potential shift in growth drivers within the sector, with smaller, more agile firms capitalizing on specific opportunities.

Revised Growth Forecasts and Target Prices

Reflecting the limited visibility on demand recovery, JP Morgan has lowered its revenue estimates across the IT sector. The brokerage has revised its medium-term growth assumptions downwards, now expecting large-cap IT firms to grow at around 3%, down from 4% previously. Mid-cap growth expectations have also been trimmed to 5% from 6%. Consequently, the firm has cut its target price-to-earnings multiples by 25% for the sector. The sharp depreciation of the Indian rupee against the US dollar is expected to offer some cushion against earnings downgrades.

JP Morgan's Updated Ratings and Price Targets

The brokerage has adjusted its ratings and target prices for several key IT companies. HCL Technologies has been downgraded to 'Neutral' from 'Overweight', while Tech Mahindra has been upgraded to 'Neutral' from 'Underweight', citing it as a 'self-help margin story'.

Consensus View from Other Brokerages

Jefferies has also adopted a more cautious stance, revising its target prices for major IT firms due to AI-led disruption and a slow revival in global tech spending. The firm maintains a 'Buy' rating on Infosys and HCLTech but has a 'Hold' on TCS and an 'Underperform' on Wipro and Tech Mahindra. Similarly, Kotak Institutional Equities expects the deteriorating macro environment to weigh on Q4FY25 numbers and FY26 guidance, predicting a sequential revenue decline for most large IT companies.

Looking Ahead: Modest Guidance Expected for FY27

Analysts do not expect large IT services companies to return to their long-term average growth rates of 7-8% in the medium term. The guidance for FY27 is anticipated to be modest. JP Morgan projects Infosys to guide for 2-5% revenue growth and HCL Technologies for 3-6% growth. Wipro's sequential growth guidance is forecast to be in the range of -2% to 0%. Management commentary on deal pipelines, discretionary spending, and progress on Gen AI will be closely monitored by investors during the upcoming earnings season to gauge the future trajectory of the sector.