IT Stocks: Kotak Downgrades Infosys, TCS To ‘Add’; LTM To ‘Sell’ After Sharp Rally

Kotak Institutional Equities has turned cautious on India’s IT services sector after a 15-35% recovery in stocks from their recent lows, cutting Infosys and Tata Consultancy Services (TCS) to ‘Add’ from ‘Buy’ and LTIMindtree (LTM) to ‘Sell’ from ‘Reduce’.

The research firm said the recent rally has reduced the upside available in the sector, taking its risk-reward from “attractive to balanced”. It sees around 6% upside in Infosys and 7% in TCS to their fair values. Kotak continues to favour challenger and hybrid IT companies, with Tech Mahindra, Coforge, Hexaware and Indegene among its preferred picks.

The change in view comes as IT companies face increasing pressure on pricing even as demand for artificial intelligence-related work grows. Kotak believes the key question for the sector is no longer whether AI will threaten the traditional IT services model, but which part of the technology value chain will benefit from the productivity gains it creates.

The research firm expects AI to generate additional work for IT services companies as businesses need support with data engineering, workflow changes, security, testing, governance and the integration of new technology with existing systems. However, those opportunities could come with lower pricing as clients seek to retain part of the savings generated through higher productivity.

Kotak expects revenue deflation of around 3-3.5% a year for Indian IT services companies through FY2029. It sees the deflationary phase continuing through FY2027-28, with a potential shift towards a new demand cycle from around FY2029. The firm estimates that around half of the savings generated through AI could be reinvested by clients into new technology use cases, although this may not be enough to offset the impact of lower pricing in the near term.

Open-weight AI models could add to the volume of work available to IT companies, particularly in areas such as model selection, tuning, proprietary-data integration, monitoring and workflow implementation. But wider access to the same models could also make it harder for vendors to command premium pricing.

Pricing has therefore emerged as a key risk for the sector. Kotak noted that most large IT vendors are now competing for similar deals, limiting the scope for the market-share gains that had supported growth in the past. If aggressive pricing continues for another six months, margin pressure could become more visible as older contracts come up for renewal and clients seek to factor in higher AI-driven productivity.

The research firm expects industry growth to remain constrained, with AI-led deflation limiting any meaningful acceleration beyond 4-5% through FY2028. For incumbent IT companies, it sees 11-12 times earnings as a potential valuation floor in a no-terminal-growth scenario and 17-18 times as the upper range. An 18-times multiple, it said, would require sustainable constant-currency revenue growth of around 4-5%.

Kotak expects challenger IT companies to be in a better position as the industry adjusts to the changing economics of AI. These companies may be more willing to pass productivity gains on to customers in exchange for larger volumes, helping them win a greater share of client spending.

Coforge and Persistent have benefited from this trend, although Kotak cautioned that the performance across challengers has not been uniform. It pointed to weakness in names such as EPAM, Globant, LTM, Hexaware, Zensar and Birlasoft.

For Infosys, Kotak expects organic growth to remain behind TCS, HCLTech and Cognizant in FY27. It also highlighted the loss of a large European account to peers as a potential headwind in FY28.

In the case of TCS, the research firm said large deal wins have supported the company over the past three quarters but have yet to translate into a meaningful improvement in overall growth. It also described the company's initial inorganic moves as relatively unexciting, while its data-centre strategy remains at an early stage.

Kotak remains cautious on LTM after growth came in below expectations. While the company's Randstad acquisitions could provide an opportunity, the research firm said execution will remain critical.

Overall, Kotak expects pricing pressure and AI-led deflation to keep a lid on near-term growth for the IT services sector. At the same time, the eventual expansion of enterprise AI use cases could create a fresh demand cycle from CY2027-28, leaving the longer-term outlook more constructive than the near-term earnings picture.

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