Jefferies upgrades Indian IT sector from Underweight, adds Infosys to model portfolio 

Concerns over AI spending, valuations and returns have intensified globally. Reflecting that shift, Jefferies has raised Indian IT services to ‘Neutral’ from its long-standing underweight stance. They have added  Infosys to themodel portfolio. It continues to prefer lenders, power, real estate and industrials as its key overweight sectors.

AI trade is losing momentum

Jefferies said the change in investor positioning has been triggered by growing doubts over the sustainability of the global AI trade.

The brokerage noted that the MSCI Korea Index has fallen around 30% from its June peak, largely because of weakness in memory-chip stocks that had been among the biggest beneficiaries of the AI boom. At the same time, US hyperscalers continue to spend aggressively on AI infrastructure, but investors have become increasingly cautious about whether those investments will generate adequate returns.

Jefferies pointed out that while AI adoption continues to accelerate, pricing trends have moved in the opposite direction.

“Though AI usage seems to surge, the token prices have declined by ~25% from peak.”

The brokerage also highlighted rising funding costs for large technology companies.

“Hyperscalers’ bond spreads have widened suggesting that the heavy AI capex is facing growing credit concerns and greater investor scrutiny.”

According to Jefferies, these developments have led investors to question whether the AI-led rally can continue at the same pace.

Foreign investors are turning positive on India

Jefferies said the changing global backdrop is benefiting India.

Several foreign investors had maintained sizeable underweight positions on Indian equities as money flowed into global AI beneficiaries over the past year. However, discussions with investors suggest those positions are now being reduced or reassessed.

“Several FPIs had been running significant UWTs on India, though our meetings in the last two weeks suggest that these positions are now either being reversed or re-evaluated.”

The brokerage added that the AI trade had not only diverted capital away from India but had also created concerns that widespread adoption of AI could hurt employment in India’s large IT services industry.

As investors increasingly focus on the economic returns from AI investments rather than headline spending, India is beginning to regain favour.

Jefferies noted that foreign portfolio investors have invested a net US$3 billion into Indian equities over the past five weeks, reversing the US$29 billion of cumulative outflows recorded over the previous four months.

IT gets a tactical upgrade

One of the biggest changes in Jefferies’ strategy is its view on the IT sector.

The brokerage has closed its long-standing underweight position on IT by adding Infosys to its model portfolio and increasing the portfolio weight of Coforge.

Jefferies said the sector has already absorbed much of the negative sentiment surrounding AI.

The Nifty IT Index has fallen 38% from its December 2024 peak, while the four largest IT companies, TCS, Infosys, HCLTech and Wipro, are down roughly 35% to 50% from their two-year highs. The sector now trades at 16.1 times one-year forward earnings, nearly one standard deviation below its 10-year average valuation of 21.3 times.

The brokerage acknowledged that revenue growth for IT companies is still expected to remain in the low-to-mid single digits through FY28.

However, it believes much of the downside has already been priced in.

“The reversal of the AI trade could drive tactical upside in the sector; particularly after the large decline.”

Jefferies also noted that recent market reactions suggest selling pressure is easing.

“The negative stock reaction to negative sector news has been much softer, indicating a tactical bottom.”

India’s earnings outlook is improving

While India continues to trade at a premium to other emerging markets, Jefferies believes improving earnings expectations are helping justify valuations.

According to the brokerage, MSCI India trades at 20 times one-year forward earnings, representing a 92% premium to emerging market peers and 29 percentage points above its 10-year average premium. However, excluding the three companies that have benefited the most from the AI boom, Samsung Electronics, SK Hynix and TSMC, India’s valuation premium is broadly in line with its historical average.

Jefferies also expects earnings momentum to improve.

The brokerage forecasts MSCI India earnings growth of 14% for FY27, up around 4 percentage points year-on-year, while noting that India’s equity market continues to exhibit significantly lower volatility than the broader emerging market index.

Economic data is supporting the bullish view

Beyond global capital flows, Jefferies said domestic macroeconomic trends have also strengthened the investment case for India.

The brokerage expects nominal GDP growth to improve by 3-4 percentage points to more than 12%, benefiting several domestic sectors, particularly financials.

It also highlighted stronger-than-expected trends across auto sales, electricity demand, construction activity and real estate.

Corporate earnings have also surprised positively.

Of the 68 companies under Jefferies’ coverage that had reported June-quarter results when the report was published, 82% either met or exceeded expectations. Analysts upgraded FY27 earnings estimates for 58% of those companies, while cutting estimates for only 34%.

Where Jefferies is positioning

While upgrading IT to a n’Neutral’ stance, Jefferies said it continued to favour several domestic sectors where it sees stronger structural growth.

The brokerage remained ‘Overweight’ on lending financials, power and utilities, industrials, telecom, real estate, steel and consumer discretionary. It also continues to prefer select names in these sectors, while trimming portfolio weights in power, real estate and hospitals to accommodate the higher allocation to IT. Those sectors nevertheless remain overweight in its model portfolio.

Conclusion

Jefferies believes the global investment narrative is beginning to shift.

For much of the past year, capital gravitated towards companies expected to benefit directly from the AI boom, leaving India relatively under-owned and Indian IT stocks under pressure.

 The brokerage now believes that trade is losing momentum as investors scrutinise AI spending, weakening pricing and funding costs more closely.

Disclaimer: This article reports on institutional research and market analysis provided by Jefferies for informational and educational purposes only. The sector upgrades, model portfolio adjustments, and market projections mentioned do not constitute personal financial advice, nor do they represent an offer or solicitation to buy, sell, or hold any security or financial instrument. Stock market investments are subject to market risks; readers should conduct their own independent research and consult a SEBI-registered financial advisor prior to making any investment decisions.

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