The trigger came from two fronts. Anthropic launched new automation tools, while Palantir claimed its AI platform can now complete SAP migrations in weeks instead of years. That second claim particularly rattled markets because ERP implementation was considered relatively safe from AI disruption until now.
Motilal Oswal’s Abhishek Pathak quantified the potential damage in sobering detail, saying that before Palantir’s comments on ERP, he estimated 30–40% of IT services revenues was at risk from AI deflation, largely focused on app development, maintenance and testing. “Assuming a 30–50% productivity hit on low-level work in these areas, we believe 9–12% of IT services revenue stands to be eliminated. We expect this to happen over three to four years, underscoring a ~2% hit on revenue growth each year,” he said.
The threat is expanding beyond known vulnerabilities. “If ERP migration and third-party enterprise software, which accounts for 10–15% of industry revenues, come under the purview of AI, the hit from AI would be higher,” Pathak warned. “This is incrementally negative for the sector.”
What made the recent selloff particularly acute was how Palantir’s earnings call expanded AI’s threat surface beyond coding into what was considered more defensible territory.
“The key catalyst was the Palantir earnings call, which highlighted how the company is upending pay-per-seat software such as Workday and ServiceNow, as well as third-party software with its own AI offerings,” Pathak explained. “In addition, Palantir also mentioned that its AI platform was powering complex SAP migration work, compressing implementation timelines from years to weeks.”
The negative catalysts piled on. “Anthropic’s entry into automating low-level legal services work and Gartner’s muted guidance also had a bearing on sentiment,” he added. “While AI’s threat to software coding hours was well known, Palantir’s comments put ERP implementation into the spotlight, which so far was considered less impacted by AI’s productivity gains.”There is a historical precedent for navigating major technological disruption, though it is hardly painless.
“AI will render much of legacy software and testing redundant. Just like hyperscalers were initially a significant headwind to infrastructure management services, and BPO got disrupted in an earlier cycle in 2015,” Pathak noted. “Many legacy IMS and BPO roles do not exist anymore, but cloud migration over a five-year period proved accretive for the industry.”
The transition period, however, was rocky. “During the early cloud build-out phase in 2016–17, hyperscaler capex expansion initially acted as a revenue headwind for Indian IT services as enterprises paused traditional outsourcing in favour of direct cloud investments. Once the capex cycle normalised, industry growth re-accelerated sharply.”
Software hit harder than services?
Not all analysts are equally alarmed. BofA Securities’ Amish Shah drew a crucial distinction between software companies and IT services firms.
“We think that the plug-ins being released by AI companies matter more for the software companies and do not change much for the IT services companies,” said Shah, Head of India Research at BofA Global Research. “The broader developments around AI’s use in business have been moving more constructively over the past few months. Companies have been highlighting the increasing opportunity available for them as more AI pilots go into an implementation phase and that their partnership with AI-first companies is driving up demand for enterprise-grade AI solutions.”
Still, Shah acknowledged new concerns. “There has been associated news flow that claims AI tools are helping finish SAP migration in a few weeks versus taking a few years earlier. This has become a new topic of discussion around deflation risk levels in the IT services sector.”
How much more can Nifty IT fall?
Technically, the Nifty IT index is at an inflection point and held the 35,400 level on a closing basis. “However, a breakdown below this level could potentially create mayhem in the sector,” said Rupak De, Senior Technical Analyst at LKP Securities. “On the other hand, if the index sustains above 35,400, we can expect a meaningful price recovery in the IT space.”
With large-cap IT stocks now trading around 20x one-year forward earnings, a marginal discount to their 10-year average, Shah advocated selectivity over sector-wide plays.
“We would continue to maintain a selective stance on the sector and prefer only those companies where visibility of acceleration in growth in FY27 is high, backed by their ability to participate in AI services spends and where there is a proactive and concerted push towards an AI-led operating model,” he said.
Unmesh Sharma of HDFC Securities struck a measured tone. “We have a neutral position on Indian IT companies in our model portfolio and we continue to hold that. We continue to believe that while India is not at the cutting edge of AI innovation, at the same point in time, as far as implementation of AI solutions across corporates is concerned, Indian companies will continue to play a fairly large role in that.”
With billions already erased, investors are clearly reassessing India’s tech story.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)