AI disruption triggers $100 billion market value erosion in Indian IT sector as foreign investors flee

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

Nifty IT hurtles toward historic 8-week bloodbath: AI death knell or ultimate bear trap?

Indian IT stocks are experiencing an unprecedented losing streak. This has wiped out significant market value and ignited a debate about artificial intelligence's future impact. Some investors see a major buying opportunity amid the sell-off. Foreign investors have exited, but one large mutual fund is aggressively buying. Analysts are divided on the sector's outlook. India's software giants are careening toward an unprecedented eighth consecutive week of losses, wiping out ₹7.7 lakh crore in market value and igniting a fierce debate on Dalal Street on whether this is artificial intelligence's final verdict on traditional IT services, or the most spectacular contrarian buying opportunity in years? The Nifty IT index is poised to end in the negative zone for the eighth consecutive week this Friday, dragging the combined market capitalization of all 10 Nifty IT stocks below ₹25 lakh crore. The relentless selling has eviscerated shareholder wealth at a pace rarely seen outside full-blown market crashes. Yet history suggests such carnage often precedes violent reversals. Apart from the April-May 2022 stretch of eight consecutive down weeks, which was followed by a swift 4.4% pullback the very next week, a similar pattern occurred in July 2008, when a seven-week decline triggered a strong rebound averaging 3-5% in the following week. Even the savage 12-week losing streak from January to mid-April 2001 eventually sparked a jump. While foreign investors staged a dramatic exodus in February, dumping a staggering ₹17,000 crore in IT shares in panic, India's largest active equity mutual fund did the exact opposite. PPFAS Flexicap Fund, managing ₹1.34 lakh crore in assets, made a bold contrarian bet by aggressively buying the very stocks sparking "Kodak moment" fears. The fund's February portfolio disclosed bold buying across India's software giants at precisely the moment analysts were slashing price targets. PPFAS added 4.3 million shares of HCL Tech, 4.2 million shares of Infosys, and 1.9 million shares of TCS as the sector recorded a brutal 20% monthly crash in February, its steepest fall since the 2008 global financial crisis. Also Read | Everyone selling IT stocks after record crash, but this Rs 1.3 lakh crore mutual fund doing the exact opposite Foreign institutional investors fled in two waves: ₹11,000 crore in the first fortnight, followed by another ₹5,993 crore between February 15-28, according to NSDL data. Jefferies analysts warn 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." In the 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 under modest assumptions of 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. The brokerage downgraded multiple stocks including Infosys, HCL Tech and Mphasis to Hold, and TCS, LTIMindtree and Hexaware to Underperform, slashing price targets by up to 33%. IT stocks still offer higher downside than upside, Jefferies said. Emkay Global also turned cautious, lowering earnings estimates for FY27/FY28 by 1%/2% respectively and slashing target multiples for IT services and BPO companies by approximately 20% and 32% respectively, "to capture conservative assumptions on required terminal growth." Axis Mutual Fund remains underweight IT amid a cautious demand environment in the US. "While rupee depreciation and attractive absolute valuations offer some comfort, relative valuations versus global peers remain elevated," the fund said. Also Read | Doomsday or deep value: India's IT stocks at crossroads after 20% crash But Nuvama is betting the other way entirely and even evoked Mark Twain's famous quote "Reports of my death are greatly exaggerated" to argue that investor fears around the extinction of software services is misplaced. "We see no existential threat from Gen-AI, as we believe the requirement for a system integrator -- which can customise an enterprise' plug-and-play software's input and output as per its requirements -- shall always exist," Nuvama said. "We also note B2B adoption of any technology is very different from that of the B2C segment. Eventually, enterprises going for automation of tasks shall still need someone to take ownership of the system -- and that will be IT Services firms," Nuvama said. The brokerage believes "IT Services firms shall face cannibalisation of revenue in the initial phase (which they are facing currently) before they reach the inflection point; post-this, the opportunity shall lead to an expansion of TAM (USD300-400bn by 2030 as per Infosys management)." "Post the recent sharp correction, we find the valuations of all stocks highly attractive," Nuvama said. "Reverse DCF also indicate extremely low terminal growth assumptions." The brokerage upgraded HCL Tech, Wipro, TechM and Hexaware to buy after which it has a bullish call on all the top 10 IT stocks. The battle lines are now drawn between those warning of structural obsolescence and contrarians betting on a classic bear trap. With the sector trading at its most attractive valuations in years and historical patterns suggesting rebounds after extended declines, investors face a stark choice: flee with the foreigners or follow India's boldest mutual fund into the wreckage. 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Are Indian techies losing jobs due to AI? CLSA analysts make a strong argument

Despite fears of AI-driven layoffs in India's IT sector, CLSA analysts say hiring remains steady, and revenue per employee is rising. IT giants like TCS, Infosys and Tech Mahindra continue to expand recruitment, especially for specialised AI roles, while AI adoption boosts productivity and margins without threatening core jobs. Artificial intelligence has become the buzzword for doomsday prophets in 2026, with fears that the technology could trigger mass layoffs even in traditionally stable, well-paid sectors like India's IT industry. However, analysts at CLSA have dismissed these concerns, pointing to data that suggests otherwise. The worries around an AI-led disruption in the IT sector began earlier this year when AI startup Anthropic launched plug-ins for its Claude Cowork agent, which can automate tasks across functions such as legal, sales, marketing and data analysis. Rising capabilities of AI tools sparked fears of the nascent technology replacing skilled software engineers, leading to concerns about massive layoffs in India's much-touted IT sector. This triggered a massive crash in IT stocks, with heavyweights Infosys, TCS, Wipro, Tech Mahindra and LTIMindtree plunging up to 30% in 2026 so far. Some analysts sounded the alarm on the need for these IT service companies to gradually reduce staff as cheaper and faster AI takes over. CLSA looked at the Naukri Jobspeak Index and daily hiring activity on Indeed to see if there was any visible early impact from the arrival of GenAI. Despite the negative sentiment around AI affecting revenue and earnings prospects for these companies and denting their hiring numbers for software and services companies, the international brokerage said that the data showed otherwise lately. Also read: Eternal, Swiggy shares fall 4%. Is LPG shortage beginning to hurt food delivery business? "Hiring activity in the IT services sector in India increased by mid-single digits YoY in Feb (per Naukri) with revenue decoupled from headcounts implying increasing revenue per employee, while BPO, which was feared to be impacted more severely, is seeing strong growth supported by healthy headcount additions. In the US and the UK, as well, regions which could be more vulnerable to job disruptions due to higher relative salaries versus India, we believe the bottom is behind it after a three-year drawdown, with hiring activity starting to pick up over the past few months," CLSA analysts said. In turn, AI is leading to higher productivity across enterprises, increasing revenue per employee despite lower utilisation levels and higher offshore efforts, the analysts said. "New hiring targets are intact for next year and are similar to last year, implying no negative impact on hiring. TCS plans to hire 40k new hires, Infosys 20k and Cognizant 20k next year," they added. CLSA, however, noted a greater need for specialised talent in AI-related roles. This is evident from the fact that IT behemoths have been announcing new vacancies for specialised roles in this area. During its recent Investor AI Day, Infosys mentioned hiring new engineers with deep domain expertise at salaries up to Rs 21 LPA. Similarly, TechM has categorised its employees into white, blue, brown and black belts regarding their reskilling efforts. On the margin front, CLSA believes that AI could help expand margins by boosting employee productivity, where some gains might be shared with clients, and a part of it retained. It so far does not see any major impact on operating margins for the companies under its coverage. "We do not yet see any impact on jobs feared to be affected by AI, which include software development, IT operations and customer service roles. We observe a similar trend in both US and UK, where the number of job postings has come down considerably since 2022, after a surge post the pandemic. Software development jobs came off much sharper in 2023, signalling the end of a large-scale tech hiring, but the same has started to pick up again. IT operations and helpdesk jobs also see a similar trend as software development, with a recent uptick in customer service jobs as well," CLSA said, citing data from job site Indeed. Earlier, Nuvama in its note said that the sharp correction in IT stocks seen since the beginning of the year, due to expectations of AI-led disruption in the sector following back-to-back AI tool launches by Anthropic, has made valuations attractive. "Reports of my death are greatly exaggerated," Nuvama said, citing Mark Twain's quote as perfectly explaining the current situation of the IT sector. "Given the advent and adoption of Gen AI, obituaries of the Indian IT services industry are being written all around. The concerns have been amplified by the sharp stock reactions, first with global SaaS and now with IT services companies," it said. Also read: RIL wipes out nearly Rs 3 lk cr this year. Is it still a value bet? Nuvama sees no existential threat from Gen AI and believes that the requirement for a system integrator, which can customise an enterprise's plug-and-play software inputs and outputs as per its requirements, will always exist. (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times) (You can now subscribe to our ETMarkets WhatsApp channel)

TCS sees $100-billion market value erosion since 2021. What lies ahead?

Nearly $100 billion has been wiped off TCS' market value from its 2021 peak amid fears of AI-led disruption that have dragged down the broader IT pack. However, brokerage Nuvama believes the selloff is overdone, saying Gen AI poses no existential threat to the sector and could eventually expand the industry's opportunity, prompting it to upgrade all top 10 IT stocks to 'Buy'. IT bellwether Tata Consultancy Services (TCS) has seen nearly $100 billion wiped off its market value from its 2021 levels, amid rising concerns about AI-led disruption in the sector. TCS' market capitalisation first crossed the $200-billion mark in 2021, making it the first Indian IT services company, and the second Indian company after Mukesh Ambani's Reliance Industries (RIL), to achieve the milestone. The stock hit an all-time high of Rs 4,592 apiece on the NSE on August 30, 2024. However, shares have since declined sharply, leading to significant market-cap erosion. The stock on Wednesday fell more than 1% to trade at Rs 2,488 apiece on NSE in afternoon trade. The company's market capitalisation at the end of Tuesday stood at a little over Rs 9.09 lakh crore (nearly $99 billion). Its peers Infosys, HCLTech, Tech Mahindra and others have also seen significant declines, despite intermittent bouts of recovery, amid concerns over a potential artificial intelligence-led disruption in the sector. The rout began earlier in February after AI startup Anthropic launched plug-ins for its Claude Cowork agent, which can automate tasks across functions such as legal, sales, marketing and data analysis. TCS and Wipro shares have fallen around 24% so far this year, while Infosys declined 21%. HCLTech and Tech Mahindra shares have dropped about 17%, while LTIMindtree has plunged around 30% so far in 2026. Nuvama remains bullish on IT stocks, arguing that the roughly 20% correction seen since the start of the year, driven by fears of AI-led disruption following a series of AI tool launches by Anthropic, has made valuations attractive. "Reports of my death are greatly exaggerated," Nuvama said, invoking Mark Twain's famous line to describe the current state of the IT sector. "Given the advent and rapid adoption of Gen AI, obituaries of the Indian IT services industry are being written everywhere. The concerns have been amplified by sharp stock reactions, first in global SaaS companies and now in IT services firms," the brokerage said. According to Nuvama, the Indian IT services industry is once again at a crossroads. The arrival of a new technology, Gen AI, threatens to disrupt the way the sector has operated so far, raising concerns about its near-term growth and long-term sustainability. However, the brokerage sees no existential threat from Gen AI and believes the need for system integrators, firms that customise plug-and-play software solutions for complex enterprise environments, will remain intact. "We also note that B2B adoption of any technology is very different from that in the B2C segment. Enterprises pursuing automation will still need someone to take ownership of the system, and that role will continue to be played by IT services firms," it added. Nuvama cautioned that Gen AI adoption will follow a typical technology adoption curve. IT services companies may face revenue cannibalisation in the initial phase, which they are currently experiencing, before the industry reaches an inflection point. "Following this, the opportunity could lead to a significant expansion of TAM ($300-400 billion by 2030, according to Infosys management). However, companies are likely to pivot from a headcount-driven to an outcome-based revenue model. This will result in lower headcount additions and a weaker correlation between hiring and revenue growth in the coming years," the brokerage said. Nuvama believes the IT services model is here to stay and that the Gen AI disruption will ultimately create larger opportunities. "Post the recent sharp correction, we find valuations across stocks highly attractive," it said. "We see this as a déjà vu moment for the industry and believe it will emerge from this disruption, just as it did from earlier ones, with a net expansion in its TAM. We remain positive on the sector from a medium- to long-term perspective, though near-term volatility may persist," the brokerage added. Nuvama now has a 'Buy' rating on all the top 10 IT services companies. It upgraded HCLTech, Wipro, Tech Mahindra and Hexaware Technologies to 'Buy' and prefers LTIMindtree, Persistent Systems, Mphasis, Infosys and Tata Consultancy Services. (Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times) (You can now subscribe to our ETMarkets WhatsApp channel)

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.

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)

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)