Nifty IT falls 4% as AI deflation, JPMorgan turns cautious

Nifty IT leads Friday’s selloff

Shares of Indian information technology (IT) companies came under heavy selling pressure on Friday, pushing the Nifty IT index down over 4% and making it the worst-performing sectoral index. The move stood out even as broader markets were also weak. The Nifty 50 was quoted at 23,919.95, down by 253.10 points or 1.05%. The sharp underperformance of IT highlighted investor sensitivity to near-term growth and margin signals. Market participants linked the fall to a mix of sector-specific worries and broader risk-off cues.

Heavyweights drag the index

Among Nifty IT constituents, Tech Mahindra, TCS, Persistent Systems, HCLTech, and Wipro declined by up to 4% each. The breadth of the decline suggested the selling was not limited to a single earnings reaction. Instead, sentiment appeared to shift against the sector as a whole, reflecting concerns about demand visibility and how new technology could change billing models. The declines also came at a time when the sector was already off its highs, leaving less room for disappointment on guidance.

Generative AI becomes a near-term growth overhang

Analysts cited deflationary pressure from Generative AI as a primary concern for IT stocks. The expectation is that automation can reduce manpower requirements for legacy projects, triggering a 2% to 3% annual drop in traditional services revenue. For an industry still heavily linked to effort-based pricing, that potential shift matters for both revenue growth and utilisation-led margin levers. The immediate market question is how quickly firms can replace this pressure with AI-led, higher-value work.

Earnings tone remains muted, SBI Securities says

Sunny Agrawal, head of fundamental research at SBI Securities, said IT sector earnings so far have been muted, often either in line with or below expectations. He flagged AI-related deflation as a key issue impacting growth prospects of major Tier 1 companies. Agrawal also described FY27 as a transition year as the industry pivots from traditional services to an integrated model powered by AI, aided by partnerships with players such as ChatGPT and Anthropic. The framing implies a period where strategy and delivery change faster than reported financials.

Infosys Q4FY26: weaker-than-expected print and guidance

According to JM Financial, Infosys reported Q4FY26 results with both revenue and margins coming in below expectations. The brokerage noted Infosys guided to FY27 revenue growth of 1.5% to 3.5% year-on-year, including 20 to 25 basis points from acquisitions. JM Financial said this was below its expectation of 2% to 4% growth, while margin guidance of 20% to 22% was in line.

Analysts interpreted the lower end of the revenue guidance as reflecting demand weakness, while the upper end assumes recovery. JM Financial also flagged that FY27 margins are expected to be impacted by a 70 bps dilution from acquisitions. Even so, the brokerage said it continues to prefer Infosys among the top IT names due to strong large deal wins, while revising EPS estimates down 1% to 2% for FY27 to FY28E.

“New Horizons” and the margin repair narrative

JM Financial said the outlook at the vertical level remains mixed but improving. It added that margins are expected to improve gradually in FY27, supported by structural cost optimisation, AI-led productivity gains, and operational efficiency initiatives under the “New Horizons” framework. The market focus here is whether productivity benefits show up in operating metrics fast enough to offset pricing pressure and slower discretionary spending.

A sharper medium-term warning from Equinomics Research

G Chokkalingam, founder and head of research at Equinomics Research, said the medium-to-long-term outlook for the IT sector remains bleak, adding that the wealth creation story appears to be over. He noted that even before the threat of AI, dollar revenue growth was modest at 2% to 4%, and is now expected to slow further to 0% to 2% or even slip into negative territory. At the same time, he pointed to a possible pathway to improvement if companies manage the transition effectively, with the potential for a more robust recovery by FY28.

JPMorgan downgrades India to Neutral, cuts Nifty scenarios

Beyond IT, JPMorgan downgraded Indian equities to Neutral from Overweight and lowered its Nifty scenario targets. The brokerage lowered its year-end target for the benchmark Nifty 50 by 10% to 27,000. It also cut its bull case target to 30,000, and trimmed its bear case to 20,500. Earlier scenarios referenced were 33,000 (bull), 30,000 (base), and 24,000 (bear), indicating a lower overall range after the downgrade.

JPMorgan said near-term risks include elevated valuations, uncertainty linked to the Iran war and broader West Asia conflict, and possible energy disruptions. It flagged earnings risks, with sector analysts cutting FY27 earnings growth estimates by 2% to 10% across key sectors. It also reduced MSCI India earnings-per-share growth forecasts to 11% for calendar 2026 and 13% for calendar 2027, after cuts of 2 percentage points and 1 percentage point, respectively.

What markets are reacting to: valuations, earnings, and dilution

JPMorgan noted India’s valuation gap versus the MSCI EM index has narrowed to 65% from a peak premium of 109%, but remains elevated. The brokerage also highlighted market dilution as a growing challenge, pointing to stake sales by top shareholders and record issuance through IPOs and QIPs as factors limiting equity market gains, even as strong local inflows cushion foreign selling.

Separately, it added that India lacks meaningful exposure to high-growth themes such as AI, data centers, robotics, and semiconductors compared to peers with stronger representation in these segments. That global allocation context matters because capital may prefer markets with more direct AI infrastructure exposure at a time when the AI narrative is also reshaping IT services pricing.

Sector and index snapshot: key numbers at a glance

How far IT has already corrected

The sector’s decline has not been limited to a single session. The Nifty IT index was reported to be about 20.5% below its 52-week high of 40,905.40. The BSE Information Technology index was said to be roughly 31% below its peak. Individual IT stocks were down 16% to 33% from 52-week highs, with Wipro, OFSS, TCS, and Coforge among the most discounted.

Brokerage actions in IT: targets lowered, ratings cut

In a separate sector note, JM Financial described a “dual blow” for the industry: macroeconomic slowdowns and productivity shifts driven by generative AI. It said enterprises are seeking AI-led productivity gains from service partners, increasing the risk of another soft year. The brokerage forecast FY27 industry growth around 4% in constant currency terms, compared with roughly 2% in FY26.

JM Financial retained a ‘Buy’ on Infosys but lowered its target price to Rs 1,660 from Rs 1,930. It downgraded TCS from ‘Buy’ to ‘Add’ and cut the target price to Rs 2,960 from Rs 3,810. MapmyIndia saw the sharpest target cut, down 44.2% to Rs 1,300 from Rs 2,330, with the stock downgraded to ‘Add’. On Wednesday at last check, Infosys was down 2.24% at Rs 1,360, TCS was down over 1%, and the BSE IT index slipped 1.65% to 31,453.21.

Why the story matters for investors

The combined set of signals is what investors are trying to price: slower near-term demand, a transition in delivery and pricing models due to AI, and a more cautious macro overlay driven by energy risks and valuation sensitivity. In IT specifically, the debate is whether AI-led productivity becomes a margin tailwind quickly, or whether it first shows up as pricing pressure and slower legacy revenues. In the broader market, JPMorgan’s downgrade and lower Nifty scenarios add another layer of caution as earnings estimates are trimmed across sectors.

Conclusion

Friday’s Nifty IT drop of over 4% underscored how quickly sentiment can turn when guidance is cautious and structural concerns like AI-driven deflation intensify. Alongside this, JPMorgan’s downgrade to Neutral and lower Nifty scenario targets reinforced the market’s focus on valuations, earnings risk, and potential dilution. The next set of cues investors are likely to watch include follow-through on FY27 earnings revisions, demand commentary during results, and how energy-linked risks shape costs and sentiment.