CLSA downgrades TCS, Infosys: Picks 4 midcap IT stocks with up to 30% upside 

CLSA on Indian IT sector: The big concern

The brokerage, in its India IT sector outlook dated August 18, said the sector is facing several macro and company-level pressures at the same time. AI-led changes are putting pressure on existing service revenues, while geopolitics, inflation, interest rates and weak discretionary spending are affecting client budgets. At the same time, order books remain healthy and AI-related work is beginning to support productivity and new revenue opportunities.

CLSA described the first quarter as a mixed period for Indian IT services and global system integrators. Its assessment is that the next phase of technology spending will produce winners and losers depending on management execution and the ability to adapt to AI-led changes. The brokerage said, “We see mid-tier IT vendors in a better position to take advantage of these tectonic changes.”

CLSA on Coforge: ‘High Conviction Outperform’

CLSA has retained its ‘High Conviction Outperform’ rating on Coforge, with a target price of Rs 2,170, implying 20.4% upside from the level considered in the report.

The brokerage believes Coforge is among the better-positioned mid-tier IT companies as clients move towards newer technology spending. Its preference is linked to the company’s management quality and execution, which CLSA believes can help it capture opportunities created by major changes in technology delivery.

The broader industry is still dealing with pressure on traditional managed services, but CLSA expects AI adoption to create new areas of work. For mid-tier companies, the ability to execute quickly and focus on specific technology and industry segments could provide an advantage over larger service providers dealing with a much larger legacy revenue base.

Coforge therefore sits on the preferred side of CLSA’s IT coverage, with the brokerage seeing enough potential earnings support to retain its strongest rating despite the wider sector pressure.

CLSA on Persistent Systems: ‘High Conviction Outperform’

CLSA has retained its ‘High Conviction Outperform’ rating on Persistent Systems, with a target price of Rs 6,246, giving it 12.1% upside.

Persistent is another company that CLSA expects to benefit from the changing technology spending cycle. The brokerage sees mid-tier vendors as better placed to capture the new work generated by AI and related technology changes.

The company also benefits from the broader trend of rising AI adoption across IT delivery. CLSA said revenue per employee is improving across the industry, which it sees as evidence that AI is already being used to increase delivery productivity.

Persistent’s positioning within the mid-tier segment gives it exposure to this change without the same degree of legacy managed-services dependence that concerns CLSA at some larger peers.

CLSA on Hexaware: ‘Outperform’

Hexaware Technologies has an ‘Outperform’ rating from CLSA, with the target price raised to Rs 730 from Rs 727. The revised target implies 30.4% upside, the highest among the four preferred mid-tier IT companies covered in the report.

The brokerage’s positive view comes despite the difficult near-term environment for IT services. AI is creating pricing and productivity pressure in existing work, but CLSA expects the volume of AI-related activity to rise substantially over time.

Hexaware’s potential upside also reflects the gap between current expectations and the longer-term opportunity that CLSA sees in the company’s business. The brokerage expects mid-tier vendors with strong management execution to take advantage of changes in how technology services are bought and delivered.

CLSA on LTIMindtree: ‘Outperform’

CLSA has retained an ‘Outperform’ rating on LTIMindtree and raised its target price to Rs 5,534 from Rs 4,570, implying 17.9% upside.

The brokerage sees LTIMindtree as another mid-tier player with sufficient execution strength to benefit from changing client requirements. Its view is based on the expectation that AI-related technology spending will increasingly move from experimentation into broader implementation.

The opportunity is not without pressure. Existing IT services can become less labour-intensive as AI tools improve productivity, potentially reducing revenue growth even when client technology spending remains healthy. LTIMindtree therefore faces the same industry transition as its peers.

CLSA on TCS: ‘Hold’

CLSA has downgraded Tata Consultancy Services to ‘Hold’, despite raising its target price to Rs 2,326 from Rs 2,165. The revised target offers only 0.5% upside.

The brokerage expects AI to become a significant contributor to TCS’s revenue over the next several years. Its estimates show AI revenue rising from $3.014 billion in FY27 to $12.121 billion in FY31, with AI revenue accounting for 33% of total revenue by FY31, compared with 10% in FY27.

TCS’s overall revenue growth is forecast at 2.5% in FY27, 3.1% in FY28, 4% in FY29, 3.8% in FY30 and 6.1% in FY31.

The brokerage’s concern is that AI-related volumes will take time to offset the deflationary effect on existing services. The result is limited near-term visibility even though the longer-term AI opportunity is substantial.

CLSA on Infosys: ‘Hold’

CLSA has downgraded Infosys to ‘Hold’, while raising its target price to Rs 1,147 from Rs 1,109. The revised target implies 2.9% upside.

Infosys is expected to see AI revenue rise from $1.932 billion in FY27 to $7.771 billion in FY31, with AI revenue reaching 32% of total revenue by FY31, compared with 9% in FY27.

CLSA forecasts overall revenue growth of 1.9% in FY27, 3.2% in FY28, 4.2% in FY29, 3.1% in FY30 and 5.6% in FY31. The figures show a similar pattern to TCS: AI becomes a much larger revenue stream over time, but the immediate growth outlook remains subdued.

The downgrade therefore reflects valuation and visibility concerns rather than a rejection of Infosys’s longer-term AI opportunity.

CLSA on Tech Mahindra: ‘Hold’

CLSA has downgraded Tech Mahindra to ‘Hold’, with a target price of Rs 1,634, implying 1.8% upside.

The company faces the same combination of AI-related disruption and macro pressure affecting the broader IT services industry. Weak discretionary spending, geopolitical uncertainty and changes in client technology budgets remain obstacles to a faster recovery.

CLSA’s broader concern is that the industry could take several years to move from AI-driven productivity gains to a level of AI-related revenue that more than offsets pressure on traditional services.

CLSA on HCL Technologies: ‘Hold’

CLSA retains a ‘Hold’ rating on HCL Technologies, although it has raised the target price to Rs 1,281 from Rs 1,191. The revised target implies 3.4% downside.

HCLTech’s AI revenue is estimated to rise from $918 million in FY27 to $5.656 billion in FY31. AI revenue is expected to account for 31% of total revenue by FY31, compared with 6% in FY27.

Overall revenue growth is forecast at 2.8% in FY27, 5.3% in FY28, 4.3% in FY29, 4.6% in FY30 and 6.4% in FY31.

The numbers show the two-stage effect CLSA expects from AI. The technology can initially reduce the amount of labour required for existing services, but the resulting productivity and new AI workloads could generate stronger growth later.

CLSA on Wipro: ‘Underperform’

CLSA has downgraded Wipro Ltd. to ‘Underperform’, cutting its target price to Rs 152 from Rs 157. The target implies a 16.5% downside.

The brokerage’s negative view reflects structural concerns alongside the industry’s macro pressures. Wipro is exposed to the same AI-led changes affecting traditional managed services, while competitive intensity has also increased.

CLSA noted that several service providers have recently reduced their 2026 growth guidance, including Accenture, Infosys, Wipro, Cognizant and EPAM. The cuts indicate that the industry-wide pressure is not confined to one or two companies.

CLSA on Mphasis: ‘Underperform’

CLSA has also downgraded Mphasis to ‘Underperform’, with a target price of Rs 2,113, implying 15.8% downside.

The brokerage cites structural concerns as part of its negative view. The company remains exposed to the pressure on traditional IT services at a time when AI tools are allowing clients and competitors to automate parts of the work that previously required larger teams.

Mphasis therefore sits alongside Wipro at the weaker end of CLSA’s coverage, in contrast with its preference for mid-tier companies such as Coforge, Persistent Systems, Hexaware and LTIMindtree.

AI revenue could change the sector by FY31: CLSA explains why  

Despite the downgrades, CLSA does not view AI as a permanent negative for Indian IT services. Its estimates indicate that AI revenue could become a substantial part of the business mix for the largest companies by FY31.

The brokerage expects AI to lead the industry towards mid- to high-single-digit US dollar revenue growth by FY31. The transition, however, is likely to be uneven. Existing services face pricing pressure as automation improves productivity, while new AI-related work will take time to reach meaningful scale.

CLSA also said there is no evidence of a major contraction in technology services budgets among large global companies because of AI. Instead, the spending mix is changing. 

Order books remain a key support for tech sector

The strongest positive from the first-quarter results was the health of order books. CLSA said overall order-book growth remained healthy, implying that demand for AI-related work is already finding its way into new contracts.

Revenue per employee is also improving, which the brokerage sees as evidence of rising AI adoption across delivery. Higher productivity can be a problem for revenue growth in the short term because fewer employees may be needed for the same amount of work, but it can also improve margins and create capacity for new projects.

The BFSI vertical continues to provide another source of support, with CLSA saying demand remains stable across most of the companies it covers.

CLSA also points to three structural pressures on Indian IT services: global capability centres, limited market-share gains over global peers, and the possibility that the global AI rollout could benefit hardware and software companies more than traditional IT service providers.

Valuations favour select mid-tier names

CLSA sees valuations across Indian IT as offering a balanced risk-reward, but with limited near-term visibility. Low- to mid-single-digit US dollar revenue growth expectations provide some support, particularly for companies offering attractive dividend yields, while macro conditions remain volatile.

The brokerage expects the possibility of a recovery into the US mid-term elections to provide a potential later catalyst for technology spending. Until then, it remains cautious on companies where the immediate revenue outlook is weak and the AI opportunity is still several years away from reaching sufficient scale.

The report points to a widening difference within India’s IT services sector. Mid-tier companies with strong execution and exposure to newer technology spending have a more favourable setup, while large service providers remain under pressure from the cost and productivity effects of AI. The pace at which new AI-related demand replaces pressure on older services will determine how quickly the sector’s growth profile improves.

Disclaimer: The views, ratings, target prices and financial estimates mentioned in this article are based on CLSA’s research report and are provided for informational purposes only. They should not be construed as investment advice, a recommendation to buy or sell any security, or a guarantee of future returns. Readers should conduct their own research and consult a qualified financial adviser before making investment decisions.