While AI adoption is creating opportunities in areas such as data, cloud and cybersecurity, Jain says the additional volume is currently not enough to offset the pricing impact. “The deflation has been far more than the volume opportunity,” he said. CLSA therefore expects large-cap IT companies to deliver only 1-3% dollar revenue growth this year and next year.
Jain does not expect this pricing pressure to disappear quickly. While there are no clear signs that AI deflation has materially accelerated over the past two to three months, his channel checks suggest that the deflation argument could remain relevant for at least the next 1.5-2 years.
The pricing pressure comes at a time when the broader demand environment remains weak. Discretionary spending has not revived meaningfully, while IT companies have cut their growth guidance over the past three to six months. This has increased uncertainty around the sector and prompted CLSA to downgrade Tata Consultancy Services (TCS) and Infosys to Hold, in the month of August.
Jain had remained bullish on large-cap IT for a long time, arguing that valuations were below intrinsic value. But after a sharp rally in July and further cuts to guidance during the quarterly results season, he believes valuations moved above intrinsic value, prompting the change in stance.
Within IT, however, Coforge remains a high-conviction Outperform for CLSA. Jain said the company’s governance standards remain strong despite the chairman’s resignation and sees the recent weakness as temporary. “We actually believe that this is a passing phase and this is a good buying opportunity for long-term investors.”
CLSA also expects Coforge could see an earnings upgrade in the July-September quarter of 2026 (Q2FY27), helped by its strong growth runway and revenue synergies from Cigniti that are yet to be fully reflected in estimates.
Jain also sees a growing gap between IT services companies and Software as a Service (SaaS) businesses. Global SaaS companies such as SAP, Salesforce, ServiceNow and Snowflake have raised revenue-growth or operating-margin guidance, while IT services companies have faced cuts.
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He says SaaS companies are benefiting from their ownership of critical enterprise data and intellectual property, allowing them to build AI capabilities directly into their platforms. At the same time, AI is automating some of the integration work traditionally handled by system integrators.
For Jain, this could ultimately shift the balance of power within the technology sector. “The companies who own IP platforms, they will be the eventual winners in the AI world.”
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