IT stocks are in a tailspin as US data increases AI disruption

Mumbai: Indian software services shares suffered another selloff on Thursday, with the Nifty IT index falling more than 5% for the second time in less than 10 days, as unexpectedly strong US jobs data for January further fueled existing concerns about AI’s impact on the sector. The NSE’s IT benchmark fell 5.5% to close at a 10-month low, with all 10 components ending between 4% and 7% lower. Coforge fell 6.6%, followed by Tech Mahindra, Oracle Financial Services Software, LTIMindtree and Infosys, which fell 6-6.4%. Thursday’s sell-off wiped out ₹1.56 lakh crore from the Nifty IT index. U.S. job growth rose in January, indicating a strong labor market that could keep the Federal Reserve from cutting interest rates. Lower interest rates are expected to stimulate demand. But investors’ biggest concern about the prospects of IT companies remains the advancement of AI technologies.

“Rapid developments in AI have created uncertainty among investors, weighing on sentiment for traditional IT stocks,” said Sumit Pokharna, vice president of Fundamental Research at Kotak Securities.

The index was down 5.9% on February 4 after San Francisco-based AI company Anthropic Claude announced Cowork, an open-source plugin designed to automate legal, sales, marketing and data analytics tasks. That fall wiped out ₹1.9 lakh crore of market value from India’s IT set in a single day.

Vikas Gupta, CEO of OmniScience Capital, said the industry has long understood the productivity potential of AI, but Anthropic’s latest announcement has highlighted its disruptive impact for equity investors, raising new fears.

Gupta said that even as demand for digital services rises and AI investments could reach $2-3 trillion over the next five years, IT services are unlikely to be disrupted overnight. “We expect IT companies will now focus on enabling AI adoption for non-tech companies. But this transition may take some time, leaving growth uncertain,” he said.

Ratings: no comfort
Gupta said Indian IT stocks were trading at premium valuations of 20 to 30 times price-to-earnings (P/E) ratio despite expected near-term revenue growth of only 2 to 4%.

“Even after this correction, we remain cautious until sector valuations become more attractive,” he said. Pokharna said that while valuations have moderated, he sees room for better entry points in the near term and remains optimistic about the medium to long term prospects of the sector.

“We believe the recent sell-off is somewhat exaggerated as not all expectations from new technologies materialize immediately and Indian IT companies are likely to adapt over time,” he said. Most large and mid-cap IT stocks have seen a build-up of bearish positions during the recent sell-off, said Rajesh Palviya, head of technical and derivatives research at Axis Securities. Now, the Nifty IT index, which closed at 33,160 on Thursday, is near a key support area.