CLSA Downgrades HCLTech, Tech Mahindra on Weak Demand; Turns Bullish on Midcap IT Stocks

CLSA’s senior research analyst Sumeet Jain has explained the firm’s recent downgrades in the IT sector, citing persistent weakness in discretionary spending and lack of demand revival outside the BFSI vertical. Speaking to NDTV Profit, he noted that “broader discretionary demand has not revived,” prompting cuts in constant currency growth forecasts ahead of Q3 earnings. HCLTech was downgraded due to its premium valuation over peers like TCS and Infosys, coupled with a weaker near-term outlook for the next two quarters. Tech Mahindra was removed from CLSA’s high-conviction list amid concerns over sluggish order book conversion and ambitious FY27 targets. However, CLSA remains positive on midcap IT players, identifying them as ideal beneficiaries of the ongoing AI wave. The firm sees 18–45% upside in: LTIMindtree (18–20%) Coforge (40–45%), boosted by its $2.35 billion Encora acquisition Persistent Systems (40–45%), praised for being in the "sweet spot" revenue size ($1.5–$2.5 bn) to leverage AI tailwinds While CLSA is reducing exposure to select largecaps, it emphasizes a sector rotation strategy rather than an exit—shifting capital within IT toward agile mid-sized firms better positioned to scale on innovation and global demand shifts.