Infosys led the rebound with a 3% jump following its collaboration with Anthropic. Coforge, HCL Tech, Tech Mahindra, Wipro and Mphasis gained up to 2.5% in early trade, lifting the Nifty IT index by 2% on February 17.
It’s been a rough February for IT stocks after investors grew increasingly wary following Anthropic’s latest AI product — designed to automate a wide range of professional tasks — reigniting concerns that artificial intelligence could erode the profitability and competitive moats of traditional IT services firms. Anthropic, the company behind the Claude chatbot, said the product is capable of automating several legal functions, including contract reviews, non-disclosure agreement triage, compliance workflows, legal brief preparation and standardised responses.
Also read: Infosys shares rise 3% on collaboration with Anthropic. Here’s what Salil Parekh said
Here’s what experts are saying
UBS noted that Indian IT services stocks have witnessed a sharp correction, with the Nifty IT index falling around 13% over the past two weeks, as concerns around long-term terminal value intensified following developments involving Anthropic and Palantir. According to the brokerage, investor worries stem from the possibility that rapid advances in agentic AI could structurally weaken the traditional staff-augmentation-led IT services model. Current valuations indicate that the market is pricing in terminal free cash flow (FCF) growth of 4–6%, compared with 6–7% a month ago, along with FCF yields of around 6%, levels not far from earlier peaks seen during the cloud transition and the Covid downturn. UBS believes the growing scepticism reflects fears of structural disruption, but argues that an evolution in the business model is both necessary and likely.
Nomura addressed investor concerns over whether AI poses an obsolescence risk for Indian IT companies. It highlighted three key worries: disruption to the application development and maintenance (ADM) market following the “Anthropic shock”; the possibility that SaaS companies themselves could become irrelevant; and potential margin compression in an AI-driven world. Nomura believes these fears oversimplify the role of IT services firms. It outlines three valuation scenarios: in a structural decline scenario, revenue growth could slow to 2–3% or even contract, with revenue deflation of 6–7%, pushing valuations down to 10–12x earnings.
In a data/AI-led pivot scenario, growth could revert to long-term averages, supporting P/E multiples in the early 20s. In a more transformative shift toward AI orchestration and outcome-based models, multiples could move higher than the early 20s, driven by non-linear revenue and margin expansion. The brokerage notes that valuations have corrected meaningfully and are now below 12-year averages and at a 12–39% discount to five-year averages. It prefers Infosys among large caps, Coforge in mid caps and eClerx in small caps.
Also read: Texmaco Rail shares jump 10% after bagging two orders worth over Rs 240 croreCiti said concerns around AI and the resulting trimming of domestic institutional investor (DII) positions could lead to further valuation gap compression. While higher volumes are expected in the long term, the key debate remains how much work will be automated and how value capture will evolve. The brokerage maintains a cautious stance on Indian IT services, citing an uncertain spending environment, rapid technological changes, elevated competitive intensity and fragmentation, faster growth of global capability centres (GCCs), and the potential impact of AI. Within its large-cap coverage, Citi prefers Infosys and HCL.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)