India’s information technology stocks is on track to record its eighth straight week of losses, a slide that has erased nearly Rs 7.7 lakh crore in market value. Investors are now grappling with a crucial question: does this slide mark the ultimate fall of IT shares, or is it a golden buying opportunity in disguise?The Nifty IT index is expected to end Friday in negative territory for the eighth consecutive week, pushing the total market capitalisation of its 10 constituent companies to below Rs 25 lakh crore. The prolonged sell-off has significantly eroded investor wealth, with the pace of decline rarely seen outside major market downturns.
Where is the sector headed?
Historical patterns suggest that extended losing streaks in the sector have sometimes been followed by quick rebounds. Take the instance of 2022 when, the index declined for eight straight weeks in April and May, before recovering 4.4% in the following week. Go back further to July 2008 for a similar pattern,when a seven-week fall was followed by gains of around 3–5% in the next week. Even the longer 12-week slide between January and mid-April 2001 eventually ended with a jump. The latest downturn accelerated in February when foreign investors sharply reduced their exposure to IT stocks. According to NSDL data, foreign institutional investors sold shares worth about Rs 17,000 crore during the month. The outflow occurred in two phases, around Rs 11,000 crore in the first half of February and another Rs 5,993 crore between February 15 and 28. While overseas investors exited the sector, one large domestic fund moved in the opposite direction. PPFAS Flexicap Fund, which manages assets of Rs 1.34 lakh crore, took a contrarian position and increased its holdings in several IT majors during the decline. Portfolio disclosures for February showed the fund purchased 4.3 million shares of HCL Tech, 4.2 million shares of Infosys and 1.9 million shares of TCS. The buying came during a month when IT stocks tumbled about 20%, marking their steepest monthly drop since the 2008 global financial crisis.
What’s the outlook?
Brokerage houses remain divided on the sector’s outlook. Jefferies warned that artificial intelligence could reshape the structure of the IT services business. According to the brokerage, 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 firm cautioned that in a worst-case scenario, stock valuations could decline by another 30–65%, with Wipro having the lowest downside risk and Coforge the highest. Even under more moderate projections — including a 3% reduction in growth during FY26–FY36 and 1% lower terminal growth — price-to-earnings multiples could still fall by 10–35% for large IT companies and up to 15% for mid-sized firms, ET cited the firm. Jefferies has downgraded several stocks as a result. Infosys, HCL Tech and Mphasis were moved to Hold, while TCS, LTIMindtree and Hexaware were downgraded to Underperform. The brokerage also cut price targets by up to 33% and said that IT stocks currently present more downside risk than upside potential. Emkay Global has also turned cautious, lowering its earnings estimates for FY27 and FY28 by 1% and 2% respectively. It reduced target valuation multiples for IT services companies by about 20% and for BPO firms by roughly 32%, saying the changes reflect “conservative assumptions on required terminal growth.” Axis Mutual Fund has maintained an underweight stance on the sector due to cautious demand conditions in the United States. “While rupee depreciation and attractive absolute valuations offer some comfort, relative valuations versus global peers remain elevated,” the fund said. In contrast, brokerage Nuvama has taken a more optimistic view, arguing that concerns about the decline of traditional software services are overstated. Referring to Mark Twain’s remark that “Reports of my death are greatly exaggerated,” the brokerage said fears around the sector’s long-term viability are 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.” The brokerage said IT services companies may experience revenue cannibalisation in the early phase of the shift, something it believes is already happening, before reaching an inflection point. After that, the opportunity could expand the sector’s total addressable market to $300–400 billion by 2030, according to projections cited from Infosys management. Nuvama also noted that the recent correction has significantly improved valuations. “Post the recent sharp correction, we find the valuations of all stocks highly attractive,” it said, adding that reverse DCF calculations indicate very low terminal growth expectations. Following this view, the brokerage upgraded HCL Tech, Wipro, TechM and Hexaware to Buy and now holds a bullish outlook on all the top 10 IT stocks. With the sector facing its longest losing streak in years, the debate among investors has intensified. While some warn that artificial intelligence could reshape the industry and pressure valuations further, others view the sharp correction as a potential opportunity after a steep fall in prices.(Disclaimer: Recommendations and views on the stock market, other asset classes or personal finance management tips given by experts are their own. These opinions do not represent the views of The Times of India)