For India’s export-heavy IT sector, a weaker currency can act as a buffer, boosting rupee-denominated earnings even as growth concerns persist. The sector has been among the worst performers in recent months after foreign investors staged a heavy exit.
According to NSDL data, foreign institutional investors sold IT stocks worth Rs 11,000 crore in the first half of February and another Rs 5,993 crore in the second half of the month. The selling came as global brokerages turned sharply cautious on the sector, warning that generative AI could fundamentally reshape the IT services business model.
Jefferies said AI could structurally shift the industry away from traditional managed services towards consulting and implementation work. Such a transition, the brokerage warned, would increase cyclicality and require major changes in talent and operating models.
The firm downgraded several companies including Infosys, HCL Technologies and Mphasis to Hold, while cutting TCS, LTIMindtree and Hexaware to Underperform. It also slashed price targets by as much as 33%. Jefferies warned that in a worst-case scenario, IT stocks could see further derating of 30% to 65%, with Wipro having the lowest downside risk and Coforge the highest.
Emkay Global also trimmed earnings estimates for FY27 and FY28 and cut valuation multiples for IT services and BPO companies by roughly 20% and 32%, citing conservative growth assumptions.
Yet the steep correction has also revived the valuation argument. Emkay now believes the market may have overreacted to the AI threat and said current valuations are becoming difficult to ignore.The brokerage noted that IT companies are now trading at 14-18x price-to-earnings multiples with free cash flow yields of 4-6%, levels that could offer attractive entry points for long-term investors. It expects potential three-year returns of 13% to 25% in a bullish scenario.
The brokerage has turned marginally overweight on the sector and added Infosys and HCL Technologies to its model portfolio. At the same time, macro developments linked to the Middle East conflict are providing a short-term cushion for exporters.
Ravi Singh, Chief Research Officer at Master Capital Services, said concerns about AI disrupting traditional outsourcing are valid but may be overstated. “With increasing applications of artificial intelligence, many industries are beginning to worry about a structural slowdown in the IT sector because some routine jobs can be automated,” Singh said.
“However, AI will also create new opportunities in areas such as cloud computing, data analytics and cybersecurity. Indian IT companies are likely to adapt rather than decline, as global businesses will continue to rely on technology partners to implement and manage these technologies.”
Singh added that currency movements could also support the sector. “Factors such as rupee depreciation and global uncertainty can help Indian IT exporters because the majority of their revenues are earned in US dollars,” he said.
The same view is echoed by technical analysts tracking the sector’s recent correction. Pravesh Gour, Senior Technical Analyst at Swastika Investmart, said the current selloff reflects uncertainty about how quickly AI could disrupt traditional revenue streams.
“Automation and AI-driven platforms have the potential to reduce repetitive coding, testing and maintenance work, which historically formed a large portion of revenues for IT services companies,” Gour said. “But large Indian IT firms are already investing heavily in AI integration, cloud services, cybersecurity and digital transformation projects. Over time these could replace lower-value services and create new revenue opportunities.”
He added that currency volatility linked to geopolitical tensions may actually provide near-term support. “A weaker rupee often benefits Indian IT companies because a large share of their revenues is earned in US dollars. This currency tailwind can support profit margins even if global technology spending slows,” Gour said.
Analysts at Mirae Asset Sharekhan also see the sector going through a structural transition rather than a permanent slowdown. Research analyst Manav Medewala said the industry’s traditional labour-intensive outsourcing model is evolving as companies integrate artificial intelligence into their services.
Large firms such as TCS, Infosys, Wipro and HCL Technologies are investing heavily in AI platforms, partnerships and acquisitions to strengthen their capabilities, he said. For instance, Wipro recently acquired Harman Connected Services to expand its AI-led engineering services, while mid-sized companies such as Coforge are acquiring AI-focused firms to deepen their digital offerings.
Abhinav Tiwari, Research Analyst at Bonanza, said geopolitical uncertainty could also reinforce the sector’s defensive characteristics. “IT stocks have historically been considered relatively defensive during periods of geopolitical stress because they have export-oriented revenues and strong balance sheets,” he said. “A depreciating rupee also supports earnings, since most of the sector’s revenues are denominated in US dollars.”
Should investors accumulate IT stocks at current levels?
Analysts caution that investors should remain selective rather than buying the entire sector after the correction. The key variable to watch is global technology spending, particularly in the US and Europe, which account for the bulk of revenue for Indian IT companies.
“If global companies start adopting AI internally and automate more processes, demand for traditional outsourcing services could slow,” Tiwari said. In that environment, companies with strong digital capabilities and leadership in AI-led services are better positioned to capture the next phase of growth.
Even veteran fund managers remain cautious about making bold calls at this stage. S Naren, Executive Director and Chief Investment Officer at ICICI Prudential AMC, had earlier told ETMarkets that the sector’s outlook will ultimately depend on how artificial intelligence affects the industry’s growth trajectory.
“If artificial intelligence does not impair the growth prospects of Indian IT services companies but instead enhances them, the sector could see a strong rally,” Naren said. However, he added that the long-term impact of AI on the sector remains uncertain for now.
Despite the uncertainty, some investors are already positioning for a potential rebound. PPFAS Flexicap Fund, which manages about Rs 1.34 lakh crore in assets, recently increased its stakes in HCL Technologies, Infosys and Tata Consultancy Services, making a contrarian bet as AI fears pushed the Nifty IT index to its steepest monthly drop since the 2008 financial crisis.
For now, the sector sits at a crossroads. Structural disruption fears from artificial intelligence continue to cloud the outlook, but weaker currency trends and lower valuations are beginning to tilt the risk-reward equation.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)