Mumbai: Jefferies sees scope for further valuation gains in select Indian IT stocks despite the sector's sharp October rally, as share prices still reflect weak long-term growth expectations. The brokerage said Infosys and TCS are the only large IT companies with potential for further valuation rerating, while Sagility stands out among mid-sized firms.
Jefferies, however, remains cautious about the sector's growth outlook and believes the risk-reward becomes unfavourable beyond 17-18 times earnings.
"Whilst the revenue growth outlook for the sector remains muted over FY26-29, a lack of incremental negative surprises on growth, amid potentially worsening sentiment on global AI capex, may drive a rerating in IT stocks," the brokerage's analysts said in a client note.
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Jefferies has raised its target prices for Infosys and TCS by 14-18% to ₹1,160 and ₹2,125, respectively, while retaining its 'hold' rating on Infosys and 'underperform' rating on TCS.
The brokerage said the worst-case scenario for IT companies would be no growth beyond FY29, in which case their stocks could trade at price-to-earnings (PE) ratios of 12-13 times.
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"Maintaining the long-term revenue growth trajectory in line with the growth seen over FY21-26 is the best case in our view," Jefferies said.
Under this scenario, it estimated PE ratios of 15-22 times for large IT companies and 22-47 times for mid-sized firms.