IT stocks go into a tailspin as US data adds to AI disruption

Synopsis

Indian software services stocks experienced a significant sell-off, with the Nifty IT index dropping over 5% for the second time in under 10 days. Unexpectedly strong US jobs data and growing concerns about AI's disruptive potential are weighing heavily on investor sentiment and valuations.

Mumbai: Indian software services stocks cracked under a fresh bout of selling on Thursday, with the Nifty IT index tumbling more than 5% for the second time in less than 10 days as the unexpectedly strong US jobs data for January added to existing concerns over AI's impact on the sector. The NSE's IT benchmark fell 5.5% - closing at a 10-month low, with all 10 constituents ending between 4% and 7% lower. Coforge slid 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.

US job data growth rose in January, signalling a strong labour market that could deter the Federal Reserve from cutting interest rates. Lower interest rates are expected to boost demand. But investors' main concern about the prospects of IT companies remains the advancement of AI technologies.

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

The index had dropped 5.9% on February 4 after San Francisco-based AI company Anthropic announced Claude Cowork, an open-source plugin designed to automate tasks across legal, sales, marketing and data analysis. That fall erased ₹1.9 lakh crore in market value from the Indian IT pack on a single day.

Vikas Gupta, CEO at OmniScience Capital, said the industry has long understood AI's productivity potential, but Anthropic's latest announcement has highlighted its disruptive impact for stock-market investors, triggering fresh fears.

Gupta said even as demand for digital services rises and AI investments may reach $2-3 trillion over the next five years, IT services are unlikely to be disrupted overnight. "We expect IT companies to now pivot towards enabling AI adoption for non-tech companies. But this transition may take time, keeping growth uncertain," he said.

Agencies

Valuations: No Comfort
Gupta said Indian IT stocks were trading at premium valuations of 20-30 times price-to-earnings (P/E) despite near-term revenue growth expectations of just 2-4%.

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

“We believe the recent sell-off may be somewhat overdone, as not all expectations from new technologies materialise 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 amid 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 zone.

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