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%.
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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.
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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)
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