AI Disruption Triggers $1.85 Billion Foreign Outflows from Indian IT Stocks in February

Foreign outflows from Indian IT stocks at 7-month high in February on AI shockwaves

March 6 (Reuters) - Foreign outflows from India's information technology stocks hit a seven-month high in February, on worries that artificial intelligence-led disruption could squeeze earnings. Foreign portfolio investors sold IT stocks worth 169.49 billion rupees ($1.85 billion) for the month. That triggered a 19.5% drop in the IT index (.NIFTYIT), opens new tab, its worst monthly performance since September 2008, when the global financial crisis upended equity markets, National Securities Depository (NSDL) data showed on Friday. The 10 constituents of the index lost about $62.8 billion in market capitalisation in February after U.S. firms such as Anthropic and Palantir unveiled key updates in AI automation. Last year, FPIs offloaded a record 750 billion rupees ($8.18 billion) of IT stocks on weaker earnings and ⁠softer client spending. "The IT sector is facing multiple headwinds, particularly from the rapid advancement of AI tools," said Piyush Gupta, fund manager at AlphaGrep Investment Management. Constructive collaborations between Indian IT firms and global AI leaders, such as the strategic partnership between Infosys and Anthropic, and improvement in earnings in the sector will be crucial to restore FPI interest in the sector, according to three analysts. Yet, February was not a one-way risk-off story. FPIs rotated aggressively into other pockets of the market, lifting overall inflows to 226.15 billion rupees, the highest in 17 months since September 2024. The rebound in broader foreign appetite was fueled by improving corporate ⁠earnings and easing trade tensions after India sealed a key trade deal with the European Union and an interim framework for an agreement with the U.S. Sectors such as capital goods, financials, metals, and energy drew strong foreign buying, supported by improving earnings despite a one-time hit from new labour codes. AlphaGrep's Gupta said that while sturdier earnings ⁠and trade progress help the long game, the FPI comeback is likely to be gradual, highly sensitive to geopolitics and external shocks. That fragility is already showing. FPIs net sold 175.70 billion rupees of shares in just four sessions in March ⁠as the escalating U.S.-Israeli war with Iran spiked oil prices and squeezed global risk appetite. ($1 = 91.6750 indian rupees) Reporting by Bharath Rajeswaran in Bengaluru; Editing by Harikrishnan Nair Our Standards: The Thomson Reuters Trust Principles., opens new tab

AI impact on IT revenue to be more than estimated: Kotak

Indian IT service providers could face a 3.0-3.5% fall in revenue in the next two fiscal years, compared with the earlier estimate for a 2.0-3.0% hit, because of enterprises adopting artificial intelligence tools and automation faster than previously expected, according to Kotak Institutional Equities. The brokerage, however, predicts the industry's long-term relevance to remain intact. Analysts at Kotak also cut their fiscal 2027 and 2028 earnings-per-share estimates for companies across the IT industry, factoring in the revised revenue deflation rate. "While we expect robust overall technology spending growth in the next few years, driven by increased Gen AI adoption, we expect a larger portion of the benefit to be captured by frontier labs and hyperscalers, with a far smaller component flowing through to services," the brokerage said in a note dated March 4. Another brokerage, Nuvama, cited figures given by HCLTech alongside the AI Impact Summit last month to predict a 2-4% revenue impact for IT services vendors in FY26 from the adoption of generative AI. Nuvama, however, noted that the near-$300 billion industry was already operating in a deflationary environment and said it would benefit in the long term. "We estimate this revenue compression shall continue to affect the revenue growth of Indian IT companies over the next few quarters," it said in a March 10 note. "Gradually, this deflation should reduce, post-which we believe it shall reach an inflection point when the net new opportunity from GenAI would more than mitigate the deflationary impact." IT firms see opportunities Technology service providers insisted that while short-term deflation is a market reality, AI-augmented work will eventually create opportunities that will offset the revenue loss. According to Nasscom's annual strategic review, AI services revenue for IT companies is pegged at $10-12 billion for FY26. "While GenAI revenues would form a small portion of deals signed, our experience has been that AI and AI-led revenues (which comprise data engineering, automation and related work) can form a significant portion of the new deals," said Joseph Anantharaju, chief executive of Happiest Minds Technologies. The company raised its FY27 growth expectation to 12.5%, up from 10% earlier, anticipating that its 'AI-First' strategy and broader portfolio of initiatives will generate traction. Its shares closed 17.6% higher at Rs 400.45 Tuesday on the National Stock Exchange after the guidance revision. AI deals are a gateway to larger digital transformation and re-engineering programmes across cloud, cybersecurity, digital engineering and industry-specific modernisations, Anantharaju said. "We are already seeing AI embedded across traditional contracts, especially in BFSI and healthcare, which means the distinction between 'AI deals' and 'IT deals' will blur quickly." As AI tools mature, clients' expectations of translating the efficiency to lower costs or faster delivery increase. For IT providers that embrace this shift, the result is typically higher throughput and larger transformation programmes, said Samir Dhir, CEO and managing director of Sonata Software. "Consequently, while pure-play AI deals may appear small in number today, AI-driven capabilities are increasingly becoming a core component of overall solution architectures," he said. Beyond opening up new tech spending areas, analysts at Nuvama said, the increase in efficiency levels due to AI deployments, between 15% and 18%, would help command higher billing rates. While some legacy headcount-based revenue may face pressure, new AI capabilities command higher billing rates, an around 30-40% premium for certain new skills, the brokerage said in a note. The brokerage upgraded the ratings for at least four stocks, HCLTech, Wipro, Tech Mahindra and Hexaware, with all the top ten service providers under its coverage now having a 'Buy' rating. These stocks had seen a major downturn in recent weeks amid fears that AI would disrupt their business.

AI disruption hits India's core IT revenue model, but new money-making avenues emerge

Indian IT firms faced a slowdown in 2025 due to uncertain global tech spending and geopolitical tensions, impacting revenue growth and margins. The sector's challenges intensified in 2026 with AI-driven structural transformation, leading to significant underperformance in the Nifty IT index. Between 2020 and 2024, Indian Information Technology (IT) companies thrived on a surge in global technology spending, fuelled by cloud migration and digital transformation. The momentum slowed in 2025 as demand uncertainty weighed on performance. Earnings visibility weakened, with many firms reporting softer revenue growth and issuing cautious guidance. Deal closures were delayed or priced more aggressively, while wage inflation and higher onsite costs squeezed margins. Income Tax Guide Income Tax Union Budget FY 2026-27 LiveIncome Tax Slabs FY 2025-26Income Tax Calculator 2025 Geopolitical tensions further dampened risk appetite, leading to reduced discretionary technology spending among major US and European Union (EU) clients. The slowdown is also reflected in equity market performance. The Nifty IT index emerged as the second-worst performer (after Nifty realty index) among the nine Nifty sectoral indices in 2025, declining 12.6%. In contrast, the broader Nifty 500 index posted a gain of 6.2%, underscoring the sector's relative weakness. The challenges have carried into 2026, intensified by mounting concerns over an AI (Artificial Intelligence)-driven structural transformation in the industry. The benchmark IT index plunged 20.7% year-to-date, dramatically underperforming the Nifty 500 index, which recorded a decline of 4.5%. The returns are based on 2 March 2026 values. AI threat: real or overstated?The key risk due to AI transition is a fundamental shift in IT companies' revenue models. Traditional streams such as application development and maintenance are giving way to more complex, high-value areas including platform engineering, AI implementation, and agentic delivery models. This evolution creates both the disruption and provide new opportunities, but it also raises uncertainty about how firms will adapt. IT loses gleam Deflationary risksSeveral brokerages have flagged deflationary risks (or downward pressure on prices and revenue per unit) to the sector due to AI. Prabhudas Lilladher, citing industry experts, estimates a 20-50% deflationary impact on traditional IT services as AI reduces process complexity and turnaround times. Motilal Oswal projects a potential 10% cut in earnings per share for large-cap IT firms if deflation materialises rapidly, though a gradual transition could allow for cyclical recovery. However, the report asserts that it is difficult to determine whether AI eventually renders IT services obsolete over the long term. Jefferies highlights sharp revenue deflation in application managed services, which account for 22-45% of IT revenues. As client engagements shift toward advisory and implementation, revenue growth could become more cyclical, demanding an overhaul of talent strategies and operating models. Terminal growth concernsAI's ability to automate code generation, testing, maintenance, and infrastructure management reduces human effort per project. This is expected to lower billing rates and revenue per employee, structurally reducing long-term growth and returns on invested capital. Lower terminal growth rates could erode valuations and hinder rerating potential. Street bets on leaders AI opportunitiesDespite the risks, AI opens new revenue pools. Legacy code modernisation -- upgrading outdated systems for cloud, AI, and security compatibility -- represents a $600 billion opportunity for Indian IT firms, according to Elara Capital. Other emerging areas include AI infrastructure, enterprise AI applications and automation ecosystems. While margins may be lower, these can offset pressure on traditional services. Experts say AI is not an existential threat. Firms investing in AI capabilities and consulting are better placed to defend margins. Growth may be slower and more selective than the past decade's volumeled expansion, but IT remains a structural export engine for India. Anirudh Garg, Partner and Fund Manager, INVasset PMS believes that in the long term, IT growth will be more productivity-driven. Demand for services in cloud, data, analytics and legacy system modernisation is expected to rise as clients prepare for AI adoption. Hitesh Jain, Fund Manager at Invesco Mutual Fund, believes companies that quickly reskill their workforce and are willing to cannibalise existing businesses could gain market share. Dec 2025 quarter performanceDespite challenges, the sector reported steady revenue growth in Q3 FY2025-26, supported by demand for digital and cloud services and a healthy deal pipeline. Discretionary spending in the US and EU remained cautious, but BFSI (banking, financial services and insurance) and retail showed early recovery signs. Large-cap IT firms demonstrated relative resilience due to diversified client bases and stronger balance sheets, while mid- and small-cap players showed sharper volatility due to vertical concentration. Deal wins were skewed toward smaller, AI-led transformation mandates rather than large, multi-year discretionary contracts. Among large players, Tata Consultancy Services, Infosys and LTIMindtree reported steady performance, with year-on-year revenue growth of 4.9%, 8.9% and 11.5%, respectively. HCLTech delivered stronger growth at 13.3%. Infosys and HCLTech also raised their FY2025-26 revenue guidance, signalling confidence in business momentum. In the midcap space, Coforge and Persistent Systems reported year-on-year revenue growth of 28% and 24%, driven by strong execution and faster deal conversions. These growth rates are in rupee terms. Investor approachDespite earnings uncertainty, sector fundamentals remain stable, with healthy cash flows and no balance sheet concerns. However, valuations have risen relative to weaker growth visibility. Tushar Badjate, Director, Badjate Stock undefined Coforge has the highest number of buy ratings in the mid cap space. These analyst ratings are compiled by Reuters-Refinitiv database.

FIIs dump Rs 17,000 crore worth of IT stocks in February. Will AI eat software?

Foreign institutional investors dumped nearly Rs 17,000 crore worth of Indian IT stocks in February amid rising concerns that artificial intelligence could disrupt the traditional software services model. While brokerages warn of further downside and earnings risks, some analysts believe AI could eventually expand the industry's long-term growth opportunities. Foreign institutional investors (FIIs) are staging a dramatic exodus from Indian software stocks, offloading nearly Rs 17,000 crore worth of IT shares in February alone, as fears mount that artificial intelligence could render traditional software services obsolete. The selling accelerated in the month's second half, with FIIs dumping Rs 5,993 crore of IT stocks between February 15-28, following a Rs 11,000 crore selloff in the first fortnight, according to NSDL data. The rout has pushed the Nifty IT index down 20% so far in 2022, making it one of the year's worst-performing sectors. The carnage comes as global brokerages slash earnings estimates and price targets, warning that AI could fundamentally reshape the industry's business model and trigger further deratings of up to 65%. Also read: Jio IPO timeline nears as $4 billion listing looms. How it may impact Reliance shareholders Jefferies has painted a grim picture of the sector's transformation, warning that AI "may structurally change IT business mix towards consulting/implementation while shrinking managed services. This would not only increase cyclicality but also require a change in talent/operating model -- thus adding risks." The brokerage downgraded multiple stocks, including Infosys, HCL Tech and Mphasis to Hold, and TCS, LTIMindtree and Hexaware to Under-Perform, while slashing price targets by up to 33%. "Despite their 16% fall YTD, stocks still offer higher downside than upside," Jefferies said. In a worst-case scenario, Jefferies warned that "stocks could derate by another 30-65% with Wipro having the lowest and Coforge having the highest derating potential." Even assuming modest growth cuts of 3% over FY26-36 and 1% lower terminal growth, PE multiples could still derate by 10-35% for large IT firms and up to 15% for mid-sized players. Emkay Global also turned cautious, lowering earnings estimates for FY27/FY28 by 1%/2% respectively across coverage companies, "factoring in our more-conservative growth and margin assumptions." The brokerage slashed target multiples for IT services and BPO companies by approximately 20% and 32%, respectively, "to capture conservative assumptions on required terminal growth." The selling wasn't confined to IT alone. FIIs also offloaded Rs 5,238 crore worth of consumer services stocks and Rs 1,775 crore of telecom stocks in February's second fortnight. In contrast, they have been net buyers in capital goods, auto, construction, metals, power and financials -- betting on sectors tied to India's infrastructure and consumption story rather than digital services threatened by AI disruption. However, not all analysts are ready to write off the sector. Nuvama maintained a contrarian stance, arguing that "the Indian IT Services industry will come out stronger from the Gen AI disruption -- with a net increase in its TAM -- just like the earlier disruptions." The brokerage said it remains "positive on the sector from a medium to long-term view," though it acknowledged that "near-term volatility might persist." Jefferies' top picks in the sector remain Coforge, Sagility and IKS Health, suggesting selective opportunities exist even amid the broader selloff. Also read: 7 out of last 8 mainboard IPOs delivered negative listing gains. What is going wrong with India's IPO market? The divergence in views underscores the uncertainty gripping India's $250 billion IT services industry as it grapples with the most significant technological disruption since the shift to cloud computing. Whether AI proves to be an extinction event or a catalyst for growth may determine the fortunes of millions of Indian software professionals and the investors who have fled the sector. (Data: Ritesh Presswala) (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)

Foreign outflows from Indian IT stocks at 7-month high in February on AI shockwaves

March 6 (Reuters) - Foreign outflows from India's information technology stocks hit a seven-month high in February, on worries that artificial intelligence-led disruption could squeeze earnings. Foreign portfolio investors sold IT stocks worth 169.49 billion rupees ($1.85 billion) for the month. That triggered a 19.5% drop in the IT index, its worst monthly performance since September 2008, when the global financial crisis upended equity markets, National Securities Depository (NSDL) data showed on Friday. The 10 constituents of the index lost about $62.8 billion in market capitalisation in February after U.S. firms such as Anthropic and Palantir unveiled key updates in AI automation. Last year, FPIs offloaded a record 750 billion rupees ($8.18 billion) of IT stocks on weaker earnings and softer client spending. "The IT sector is facing multiple headwinds, particularly from the rapid advancement of AI tools," said Piyush Gupta, fund manager at AlphaGrep Investment Management. Constructive collaborations between Indian IT firms and global AI leaders, such as the strategic partnership between Infosys and Anthropic, and improvement in earnings in the sector will be crucial to restore FPI interest in the sector, according to three analysts. Yet, February was not a one-way risk-off story. FPIs rotated aggressively into other pockets of the market, lifting overall inflows to 226.15 billion rupees, the highest in 17 months since September 2024. The rebound in broader foreign appetite was fueled by improving corporate earnings and easing trade tensions after India sealed a key trade deal with the European Union and an interim framework for an agreement with the U.S. Sectors such as capital goods, financials, metals, and energy drew strong foreign buying, supported by improving earnings despite a one-time hit from new labour codes. AlphaGrep's Gupta said that while sturdier earnings and trade progress help the long game, the FPI comeback is likely to be gradual, highly sensitive to geopolitics and external shocks. That fragility is already showing. FPIs net sold 175.70 billion rupees of shares in just four sessions in March as the escalating U.S.-Israeli war with Iran spiked oil prices and squeezed global risk appetite. (Reporting by Bharath Rajeswaran in Bengaluru; Editing by Harikrishnan Nair)