- Kotak Institutional Equities cuts earnings and price targets for seven Indian IT firms due to AI risks
- Price targets lowered 15%-28%, with TCS target cut to Rs 3,090 and Infosys to Rs 1,530
- Kotak favours Infosys, TCS, Tech Mahindra, Coforge, and Hexaware amid cautious sector outlook
Brokerage firm Kotak Institutional Equities has cut earnings estimates and price targets for several major Indian IT services companies, warning that the rapid adoption of generative artificial intelligence could weigh on the sector's long-term growth prospects. The brokerage lowered earnings per share (EPS) estimates for seven companies - Infosys, Tata Consultancy Services (TCS), Wipro, HCLTech, Tech Mahindra, Persistent Systems and Coforge - and reduced their fair value estimates by 15% to 28%.
The price target cuts come after Citi recently lowered target prices across its India IT coverage by 14-29%, citing changes in valuation multiples and terminal growth assumptions, while maintaining a cautious stance on the sector.
Price Targets Cut Across the Sector
Kotak has reduced its target prices for seven IT companies as part of the downgrade.
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The brokerage now has a target price of Rs 3,090 for TCS (Buy), down from Rs 3,675 earlier, while Infosys' (Buy) target has been cut to Rs 1,530 from Rs 1,900.
For other Tier-1 companies, Kotak lowered Wipro's (Sell) target to Rs 190 from Rs 240, HCLTech's (Reduce) target to Rs 1,425 from Rs 1,680, and Tech Mahindra's (Buy) target to Rs 1,615 from Rs 2,000.
Among mid-tier firms, Coforge's (Buy) target price has been reduced to Rs 1,620 from Rs 2,250, while Persistent Systems' (Reduce) target has been lowered to Rs 4,615 from Rs 5,900.
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Preferred Picks Despite Caution
Despite the cautious sector outlook, Kotak highlighted a few companies it believes remain relatively well positioned. Among large-cap IT firms, the brokerage prefers Infosys, TCS and Tech Mahindra, citing reasonable valuations and strong cash generation.
In the mid-tier segment, Kotak favors Coforge and Hexaware, which it believes could benefit from emerging technology spending opportunities and market share gains.
Kotak said the revised growth outlook and rising disruption risks prompted it to increase its cost-of-equity assumptions by 50-100 basis points across companies. The brokerage also trimmed EPS estimates by around 1-3% for the companies under coverage. Kotak expects Tier-1 IT stocks to trade at target price-to-earnings multiples of around 13-18 times, while mid-tier companies could command 18-27 times earnings based on FY2028 projections.
AI Efficiency Could Pressure Revenues
Kotak said the growing use of generative AI tools in software development and IT operations could significantly improve productivity, potentially reducing the amount of outsourced work required by enterprises. The brokerage now expects revenue deflation of around 3-3.5% for the IT services industry in FY2027-28, higher than its earlier estimate of 2-3%.
Kotak has cut US dollar revenue estimates by around 1-2% for FY2027-28 across companies under coverage. While global technology spending is expected to grow strongly due to rising investments in AI, Kotak believes a large share of that spending may flow toward hyperscalers and frontier AI labs rather than traditional IT services companies.
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