AI Disruption Looms Over IT Services Sector as Jefferies Cuts Targets, Flags Structural Shift

New Delhi, February 24: The IT services sector is entering a transformative phase as artificial intelligence reshapes traditional business models, with brokerage firm Jefferies warning of deeper structural changes ahead.

According to the latest Jefferies report, AI-driven disruption is set to shrink the conventional managed services business while increasing the share of advisory and implementation engagements. The brokerage cautioned that this transition could heighten revenue cyclicality and demand significant changes in talent strategy and operating models.

AI Impact Not Over, Price Targets Cut by Up to 33%​

Jefferies said the AI impact is far from over and has reduced price targets by as much as 33 percent for certain companies. The firm also downgraded key industry leaders, including TCS and Infosys.

Despite a 16 percent year-to-date decline in IT stocks, the brokerage believes downside risks still outweigh upside potential.

The Nifty IT index has fallen 14 percent so far this year and underperformed the Nifty50 by 12 percentage points. Although third-quarter results triggered earnings upgrades for most IT companies, recent AI developments have clouded the medium to long-term growth outlook and led to a 27 percent decline in sector ratings.

Jefferies noted that stock performance is now more likely to track long-term business prospects rather than short-term earnings momentum.

Structural Shift in Revenue Mix Expected​

The report predicts a fundamental change in the sector’s business mix.

While IT firms are expected to remain relevant, client engagements are likely to pivot toward advisory and implementation services. In contrast, application managed services, which currently contribute 22 to 45 percent of revenues, may witness a significant decline.

Jefferies warned that the timing and depth of this decline could intensify as AI tools become more sophisticated.

A rising share of consulting and implementation work would increase cyclicality in revenue growth. At the same time, companies would need to recalibrate talent strategies and redesign operating models. The brokerage highlighted that such structural adjustments are complex and investors must factor these risks into valuations.

Growth Assumptions Under Scrutiny​

Jefferies estimates that current market prices imply revenue compound annual growth rates of 6 to 14 percent for large IT firms and 9 to 17 percent for mid-sized players over FY26 to FY36.

The brokerage outlined three potential scenarios. In the best case, firms maintain long-term revenue growth similar to the previous decade. In the worst-case scenario, revenue CAGR could decline by 3 percent over FY26 to FY31, translating into 15 percent cumulative deflation, followed by stagnation beyond FY31.

Claude’s Launch Intensifies Automation Debate​

Recent launches from Anthropic’s Claude, including Claude Code for legacy code modernization and Claude Code Security for vulnerability detection, have intensified concerns about automation of labor-intensive IT services.

The debate has shifted from AI as a productivity enhancer to AI as a potential disruptor of long-standing business models. Investors and analysts are now examining whether such tools could replace human-led teams across programming, application modernization, cybersecurity audits, legal processes, and other service areas.

Global and Domestic Market Reaction​

The market response has been sharp.

Technology major IBM saw its shares plunge more than 13 percent on Monday, marking its steepest fall in over 25 years, following claims about Claude Code’s ability to streamline legacy language modernization. The sell-off raised fresh concerns about the durability of consulting and infrastructure revenues.

Cybersecurity and software firms such as CrowdStrike, Datadog, and Zscaler also faced pressure as investors reassessed growth assumptions in segments once considered resilient.

In India, frontline IT companies including TCS, Infosys, HCL Technologies, Wipro, and Tech Mahindra witnessed notable declines, dragging the Nifty IT index lower amid fears that AI adoption could structurally reduce demand for traditional outsourcing and managed services.

Analyst Views Diverge on Long-Term Impact​

While Jefferies has adopted a cautious stance, analyst opinion remains divided.

Some argue that the correction may be excessive and that enterprises continue to view AI primarily as a productivity enhancer rather than a complete replacement for human capabilities.

A recent note by HSBC Global Investment Research stated that software will remain the primary channel for AI diffusion across large enterprises. The report argued that foundation models and coding tools are not realistic replacements for core enterprise IT platforms.

HSBC added that 2026 could mark the beginning of monetization within software, while emphasizing that foundation AI models are technically flawed for large-scale, high-fidelity enterprise platform replacement.

Outlook for IT Services in the AI Era​

The evolving AI landscape has placed the IT services sector at a crossroads. As automation capabilities expand, companies may need to transition from stable managed services revenues to more project-based, advisory-led engagements.

With valuations already adjusting and growth expectations under review, investors are closely monitoring how IT firms recalibrate their business models in response to AI-driven disruption.