Key Takeaways
- Nifty IT index dropped 5.1% intraday, marking a fifth straight session of losses.
- Anthropic’s Claude Code tools have ignited fears that AI will compress revenues from legacy‑software modernization.
- Jefferies cut target prices by up to 33% and downgraded Infosys, HCL, TCS and others to “hold” or “underperform.”
- CLSA says the AI scare is overstated, yet it trimmed valuations across the sector, keeping a selective list of favourites.
- Investors must decide whether to ride the dip for a potential rebound or exit before further downside.
You assumed AI would be a tailwind for Indian IT—today it’s turning into a headwind.
Why the Nifty IT Index’s 5% Dive Signals a Structural AI Threat
The Nifty IT index was down 5.1% around 12:50 pm, making it the worst‑performing sector on the benchmarks for a fifth consecutive session. The plunge follows a cascade of AI‑related headlines, most notably Anthropic’s claim that its Claude Code suite can dramatically reduce the cost and complexity of modernizing legacy software. For firms whose core revenue streams still revolve around maintaining, upgrading and supporting legacy applications, that claim feels like a direct attack on the profit engine.
Legacy‑software services have traditionally enjoyed high‑margin contracts because they are labor‑intensive and require deep domain expertise. If AI can automate large chunks of code refactoring, testing and compliance checks, the labor component shrinks, and with it the pricing power of service providers. The market is pricing that risk aggressively, which explains the steep intra‑day slide.
How AI‑Driven Legacy Modernisation Could Reshape the Indian IT Business Mix
Analysts at Jefferies warn that AI may shift the sector toward consulting and implementation work while eroding the managed‑services segment. Managed services—long‑term outsourcing arrangements that provide steady cash flow—are considered “defensive” because they generate recurring revenue. A move toward project‑based consulting makes earnings more cyclical, meaning they will fluctuate more with macro‑economic conditions.
In practice, firms will need to re‑engineer their talent models. Software engineers who once coded for hours may become overseers of AI‑augmented pipelines, requiring a blend of data‑science skills and client‑facing consulting chops. The transition incurs execution risk: retraining, hiring, and redesigning delivery models all cost money and time, potentially denting near‑term margins.
Competitor Reaction: Tata Consultancy Services, Tech Mahindra and the Rest of the Pack
Tech Mahindra fell 6.7% to Rs 1,344.7, while HCL Technologies slipped 6.5% to Rs 1,333.7. Infosys shed 4.6% and TCS slipped 4%—the two market‑cap leaders felt the pressure despite their diversified client bases. Wipro’s 3% dip was comparatively modest, reflecting its already higher exposure to digital transformation contracts.
LTIMindtree, a pure‑play digital services firm, tumbled 6.3% to Rs 4,526.7, underscoring that even niche players are not immune. The common thread is a reassessment of earnings forecasts: analysts are trimming the “legacy‑maintenance” tail of the revenue curve and emphasizing the uncertain upside from AI‑enabled services.
Historical Parallel: The 2015 Cloud Migration Wave and Its Lessons
When cloud adoption surged in 2015, many Indian IT firms saw their traditional data‑center maintenance contracts evaporate. Companies that pivoted quickly to cloud‑native services (e.g., TCS’s “CloudFirst” strategy) not only recovered but expanded margins. The current AI disruption mirrors that shift: firms that invest in proprietary AI platforms, partner with leading model providers, or acquire niche AI specialists may emerge with a new competitive moat.
However, the lag between technology adoption and revenue realization can be several quarters. Investors who bought on the dip in 2015 missed the upside, while those who held through the transition reaped double‑digit gains. Timing will be crucial this round as well.
Sector‑Wide Valuation Adjustments: What the Target‑Price Cuts Mean for Your Portfolio
Jefferies trimmed target prices by 26‑31% for Infosys and HCL, and by 28‑33% for the broader IT basket. CLSA, while more measured on the AI narrative, still reduced its valuation multiples, citing a “valuation de‑rating” and lingering skepticism on medium‑term growth. The price‑to‑earnings (P/E) multiples for the sector have slipped from an average of 28x a year ago to roughly 22x today.
For value‑oriented investors, the lower multiples present an entry point if the AI risk is over‑priced. For growth‑focused investors, the downside risk remains elevated until we see concrete evidence that AI tools are being monetized as incremental efficiency gains rather than revenue cannibalizers.
Investor Playbook: Bull vs. Bear Scenarios for Indian IT Stocks
Bull Case
- AI tools are adopted as productivity enhancers, preserving legacy‑service margins.
- Companies accelerate AI‑enabled consulting offerings, opening higher‑margin revenue streams.
- Macro recovery in FY26 boosts client spending, allowing firms to re‑price services.
- Valuation multiples revert to pre‑sell‑off levels, delivering 15‑20% upside.
Bear Case
- AI automates a significant portion of legacy code work, compressing pricing power.
- Clients shift budgets toward in‑house AI platforms, reducing outsourcing spend.
- Higher cyclicality leads to earnings volatility and margin contraction.
- Further target‑price cuts push P/E multiples below 15x, extending the downside to 25% or more.
In short, the next 12‑18 months will test whether AI is a catalyst for new growth or a structural disruptor that reshapes the Indian IT landscape. Align your exposure with the scenario you believe is most probable, and keep a close eye on earnings guidance, AI partnership announcements, and the pace of client adoption.