IT Stocks: Limited Valuation Gains Ahead Without Growth Recovery, Warns Jefferies
Jefferies reports that Indian IT stocks may see limited valuation gains unless revenue growth recovers and AI spending concerns subside.
The recent surge in Indian IT stocks valuation has caught the eye of investors, but brokerage firm Jefferies warns that this rally may have hit a ceiling. According to a recent report, further gains in the valuation of large IT companies could be limited unless there is a tangible improvement in the sector's growth outlook.
Sentiment-Driven Rally vs. Fundamental Growth
Jefferies points out that the recent upward movement in IT stocks has been primarily fueled by a shift in investor sentiment regarding long-term prospects, rather than any actual increase in revenue or earnings estimates. In fact, the brokerage notes a disconnect between share prices and financial performance.
While the Nifty IT index has seen a rise of approximately 3 per cent since February 2026—outperforming the Nifty 50 by 12 percentage points—this gain was heavily concentrated in October. This follows a volatile start to the year where the index plummeted nearly 20 per cent in the first two months. The October spike, where stocks gained up to 20 per cent, was largely attributed to an expansion in price-to-earnings (PE) multiples rather than improved fundamentals.
The AI Factor and Revenue Concerns
The report emphasizes that the future of these valuations hinges on two critical factors: stable revenue growth expectations and the global sentiment surrounding artificial intelligence (AI) spending.
“While the growth outlook for IT remains uncertain, with stocks pricing 2-4ppts lower growth vs. history, any lack of disappointment in growth expectations and worsening sentiment on global AI capex could drive PE rerating,” Jefferies stated.
Despite favorable currency movements, the brokerage highlighted a concerning trend: consensus earnings-per-share (EPS) estimates for large IT firms have actually been slashed by 3-5 per cent since February.
Growth Projections: A Dip from History
Current share prices suggest a specific trajectory for organic constant-currency revenue growth over the period of FY26-36:
- Large IT Companies: Projected growth between 0-9 per cent.
- Mid-sized Firms: Projected growth between 6-14 per cent.
These projections are notably lower—by 2 to 4 percentage points—than the growth recorded during the previous decade (FY16-26).
Risk-Reward Analysis and Investor Advice
Jefferies provides a cautionary note on the risk-reward profile for large-cap IT firms, citing Wipro as an example. The report suggests that while best-case PE multiples for such firms range from 19-22x, the risk-reward balance becomes unfavorable once the PE exceeds 17-18x.
Consequently, the brokerage advises investors to be highly selective. The ability of these companies to sustain long-term revenue growth and provide clear visibility on earnings will be the deciding factors for any future valuation gains.