The sell-off is being driven by fears that highly autonomous tools such as Claude, Palantir’s enterprise platforms and other AI agents could reduce the need for large teams of programmers and testers. The bear argument is that if enterprises can generate and maintain code internally using AI, the core value proposition of Indian IT services weakens.
Brokerages have acknowledged that AI-led productivity gains are compressing billing-linked revenue models in the short term. Discretionary spending by global clients has also slowed. At the same time, deal pipelines are increasingly AI-focused.
Cyclical slowdown or structural reset for investors?
The key question for investors is whether this is a cyclical slowdown or a structural reset. From a valuation perspective, some analysts argue that the recent correction has made largecap IT more reasonable. Abhishek Jain of Arihant Capital Markets said there may not be a strong case for wholesale sector rotation at current levels.
“The recent correction has brought valuations of several large IT companies to more comfortable levels. This could be a phase for gradual accumulation rather than panic exits,” he said, adding that more partnerships between global AI firms and Indian IT majors could emerge.However, others believe the near-term risk-reward favours domestic-facing sectors. Pranay Aggarwal, Director and CEO of Stoxkart, said investors looking to rotate out of IT are finding better visibility in financials, capital goods, consumption and autos.”India’s banking sector is seeing credit growth of 14-16% with improved asset quality and stable margins. Government capex has risen sharply in the recent budget, supporting infrastructure and capital goods companies. Rural recovery and easing inflation are aiding consumption,” he said.
The banking sector has been one of the key beneficiaries of strong domestic demand. Credit growth remains in the mid-teens, gross non-performing assets are at multi-year lows, and return ratios have improved. PSU banks, in particular, have reported profit growth of 20-30% in recent quarters. Aggarwal said these segments offer stronger earnings visibility in an uncertain global environment.
“Capital goods and infrastructure linked companies is also an interesting space to look upon for opportunities, underpinned by sustained government capex and robust order books. Additionally, the pharmaceutical sector also has a favourable outlook, supported from easing of export pressures in the US generics market, lead by the recently concluded India–US tariff deal, which improves growth visibility for exporters,” said Ravi Singh, Chief Research Officer at Master Capital Services.
Saurabh Jain of SMC Global Securities said the current cycle favours domestic demand-driven sectors. “Strong credit growth in banking, higher capex, rural demand recovery and stable auto sales are supporting earnings. In comparison, IT revenue growth has moderated due to global uncertainties,” he said.
Anubhav Mukerjee of Prescient Capital added that autos and power equipment as niche areas offering attractive opportunities over the next one to two years. He cited tailwinds from tax changes, lower interest rates and premiumisation trends in automobiles.
How are institutional investors dealing with IT stocks currently?
Institutional investors appear to be taking a selective approach, according to several analysts. Large IT companies with strong balance sheets, deep client relationships and credible AI strategies are still attracting long-term interest, but exposure is being trimmed where earnings visibility is weak.
In January, India’s fund managers seem to have pared stakes in major IT companies as 9 out of 10 companies in the sector saw outflows with ICICI Prudential AMC leading the exodus. However, this doesn’t mean to say, institutions are completely looking away from such names.
Khushi Mistry, Research Analyst at Bonanza said institutions are not turning structurally negative on the sector but are recalibrating. “Institutions are not bearish structurally. Instead, they are repositioning based on fundamentals. They are also differentiating between companies that are monetising AI and those still dependent on manpower-driven execution,” she said.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
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