As Rs 5.7 lakh crore evaporates from the sector in just eight trading sessions and the Nifty IT index crashes 19% in the short span, the Wall Street giant is turning contrarian, declaring “deep value” buying opportunities in bloodied bellwethers Infosys and TCS.
“IT Services companies remain the plumbers in the tech world,” JP Morgan analysts led by Ankur Rudra wrote in a note provocatively titled “Discounted for extinction?” “If enterprise software/SaaS is rewritten on a bespoke basis by agents—it will need significant services plumbing to work in enterprise context and minimise AI slop.”
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Crisis-Level Valuations Scream Opportunity
The plumbing metaphor is deliberate. While AI tools like Claude Cowork spark fears of wholesale disruption, JP Morgan argues someone still needs to make enterprise software actually work and that’s where Indian IT services remain irreplaceable.
“Free cash flow/dividend yields scream deep value and are crossing levels prior seen during market dislocation events such as GFC and COVID,” the analysts wrote, recommending a “barbell approach to buy deep value in large caps” with overweight ratings on Infosys and TCS, alongside growth champions Persistent Systems and Sagility.
The carnage has been brutal. Infosys plunged 21% over the eight-day massacre, TCS tumbled 19%, HCL Tech shed 17%, while Wipro and Tech Mahindra lost 13%. TCS has crashed 44% from its August 2024 peak, with its market cap falling below Rs 10 lakh crore to 2020 levels. On Thursday alone, Infosys fell 7% while TCS, HCL Tech and Wipro dropped 4-5% each. TCS shares are now back to where they were over 5 years ago in September 2020.
Pricing in Apocalypse
JP Morgan’s reverse discounted cash flow analysis reveals the extent of market despair. At current prices, TCS, Infosys and HCL Tech are baking in just 4%, 4% and 5.6% revenue growth over the next decade—sharply below the long-term average of 7-8% and effectively implying terminal growth with zero acceleration.
“The only case with more than 30% further downside is companies hit 0 terminal growth with no growth thereafter,” the note stated. “Both these scenarios appear overly pessimistic to us given the new AI work streams emerging and the likely cyclical recovery.”
Even if the sector’s dismal low-single-digit growth of recent years became permanent, JP Morgan calculates at most 10% downside from current levels, hardly justifying the panic selling.
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The Plumber’s Paradox
The bank’s thesis centers on a counterintuitive reality: more AI could mean more plumbing work, not less.
“While advances such as Claude code’s Cowork plugin can meaningfully accelerate complex task and agentic AI can write a lot more software, it’s simplistic to assume this will be enterprise grade for every function and enjoy the tribal enterprise context IT Services vendors excel at,” the analysts wrote.
JP Morgan expects AI to create net new areas of work including modernizing multi-decadal legacy code that was previously too expensive to rewrite, developing custom agentic versions of SaaS platforms if existing software needs replacing, AI agents for operations, AI trust and reliability services, and physical AI integration.
“We definitely foresee partnerships as have been announced with AI tool firms and IT Services firms that can create several new areas of work,” the note added.
The firm also argues that enterprise tech teams have been “classically under-funded, with several more demands from business than IT can deliver.” AI becomes another tool—like offshore labor, enterprise software and cloud before it—to address more work with the same budget. “This will still need services firms.”
Deep Value at Dislocation Prices
With the sector trading at valuations previously seen only during major market crises, JP Morgan’s scenario analysis suggests limited further downside even in bear cases, while any marginal recovery in growth could drive significant upside.
The bank acknowledges it’s “tough to quantitatively counter” AI disruption fears in the short term, especially given three years of low-single-digit growth and potential for further misses as AI crowds out spending and lengthens sales cycles.
But as dividend and free cash flow yields hit once-in-a-decade levels, JP Morgan is betting the market has overshot, pricing India’s software plumbers for a future where enterprises somehow won’t need anyone to fix the pipes.