FIIs have a major negative impact on IT stocks, taking out another Rs 11,000 crore in two weeks

Foreign institutional investors (FIIs) are fleeing India’s tech sector at an alarming rate, unconvinced that software services giants can survive the AI ​​disruption that threatens to erode their business models. FIIs withdrew Rs 10,956 crore from Indian IT stocks in the first two weeks of February after the launch of new models from Claude and Palantir heightened fears that highly autonomous tools could disintermediate the companies that the Indian stock market has long considered crown jewels.FIIs had already dumped Rs 74,698 crore worth of IT stocks through 2025, followed by another Rs 1,835 crore worth of sales last month, as investors question the relevance of Indian IT services companies’ business models. Highly autonomous tools like Claude Cowork and similar tools from Palantir threaten to disintermediate IT services companies, as a reduction in effort and a compression of value could herald a wave of sharp revenue erosion.

The Nifty IT index has fallen by around 13% this calendar year. Wipro is down 19%, LTIMindtree 22%, LTTS 14.5%, while Infosys and LTIMindtree are also down double digits.

The IT route is in stark contrast to the broader FII behavior this month. Foreign investors have attracted net buyers in India of Rs 19,675 crore in the past fortnight following the announcement of an interim trade deal between the US and India, which also eased pressure on the rupee. Capital goods stocks attracted over Rs 8,000 crore in foreign buying, financials Rs 6,175 crore, while oil and gas, metals, power and construction sector also inflows. Both FMCG and healthcare saw outflows of over Rs 1,000 crore each, but nothing close to the size of the IT exodus.

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“We believe these concerns oversimplify the role of IT services providers,” said global brokerage firm Nomura, arguing that companies are not simply ditching complex technologies for unproven alternatives. “It’s easier said than done that a SaaS product and IT vendors can be replaced by vibe-coded apps, given that enterprise IT buyers are optimizing for career risk – reducing the risk of failure – and not necessarily for costs and innovations.”

Nomura outlines three scenarios where this ends. In the worst case of a structural decline, revenue growth fluctuates between +2-3% or even shrinks, with price-to-earnings ratios falling to 10-12x, as routine work is automated and IT companies fail to replace lost business. In a middle scenario, companies focus on data and AI-driven services, growth returns to high single digits, and the multiple stabilizes in the early 20s. In the most optimistic scenario, IT companies transform into AI orchestrators, shifting from sales efforts to sales results, with Cognizant recently indicating that the addressable market in this model expands from a $1.5 trillion opportunity in pure technical services to a $4.5 trillion opportunity in augmenting or replacing human business labor.

“The current sell-off in IT services stocks appears to be an example of bringing pain to the fore: pricing in the extinction of old business models before profits emerge from new business models,” Nomura said. Broker note valuations have corrected below the 12-year average and at a 12-39% discount to the five-year average, with dividend yields of 4-5% likely to create a floor. The preferred choices are Infosys and Cognizant among the large caps, Coforge among the mid caps and eClerx among the small caps.

For their part, giants like TCS and Infosys have announced roadmaps to leverage some of the billions of dollars in AI services.

“IT services companies have the advantage of contextual insight into the complex environment of enterprises, domain knowledge and customer trust; therefore, we believe they would remain relevant even in the AI ​​era,” said Emkay Global.

(Ritesh Presswala)