- Indian IT index down 13% YTD, outperformed by broader market.
- AI spending by US megacaps fuels margin‑pressure fears.
- JPMorgan sees limited upside unless growth accelerates post‑FY26.
- Barbell play: deep‑value caps (Infosys, TCS) + selective growth bets.
You missed the early warning sign on AI‑driven volatility – and that mistake could cost you.
Related Reads: Tech Stocks and AI Fears Weigh on Asian Markets
Why the Nifty IT Index Is Crashing Harder Than the Nifty 50
The Nifty IT Index slumped 5.5% in a single session and has shed roughly 13% since the start of the year, while the broader Nifty 50 has hovered near flat. The divergence stems from two converging forces: a sharp sell‑off in U.S. technology equities and a growing perception that AI could erode the traditional services model of Indian IT firms.
Key contributors to the dip were heavyweights such as Infosys, TCS, Wipro, HCL Technologies, Coforge, and Tech Mahindra. Their ADRs mirrored Wall Street, with Infosys ADR tumbling almost 10% and Wipro ADR down 4.6% after the Dow, S&P 500, and Nasdaq posted double‑digit percentage losses.
Sector‑Wide AI Angst: How Global Tech Spending Is Dragging Indian IT
U.S. megacap giants—Amazon, Google, Meta, and Microsoft—have pledged close to $650 billion on AI initiatives. While the headline number sounds like a growth catalyst, investors worry about the flip side: massive capex, tighter margins, and an uncertain timeline for monetisation. When those firms see their share prices wobble, sentiment bleeds into every tech‑related exposure, including offshore service providers.
In practical terms, AI could automate large swaths of code generation and testing, traditionally billed as high‑margin services. The fear is that clients will shift spend from custom development (a core revenue stream for Indian firms) to off‑the‑shelf AI platforms, compressing billable hours and squeezing profit margins.
Historical Parallel: The 2000‑2002 Dot‑Com Collapse and the 2008‑2009 GFC
Every major tech correction leaves a fingerprint on Indian IT stocks. During the early‑2000s dot‑com bust, the Nifty IT fell over 30% as U.S. internet stocks collapsed. The sector rebounded once the market realized that Indian firms were still essential for maintenance, integration, and support services.
A more recent analogue is the 2008‑2009 Global Financial Crisis. IT stocks fell sharply but recovered because enterprises continued to outsource cost‑effective services. The current AI‑driven narrative bears similarity: the technology stack evolves, yet the plumbing—system integration, legacy migration, and managed services—remains indispensable.
Competitor Landscape: How Tata, Adani, and Global Players React
Within India, Tata Consultancy Services (TCS) is betting on AI‑augmented consulting, launching a suite of “Intelligent Automation” offerings. Infosys has doubled down on its “AI‑First” strategy, creating a dedicated AI practice that now accounts for roughly 3% of revenue.
Adani’s foray into the IT space is limited, but its logistics and data‑center ventures illustrate how conglomerates are hedging against pure‑play software risk by diversifying into infrastructure. Globally, firms like Accenture and Cognizant are also feeling the squeeze, with both reporting double‑digit stock declines after disappointing earnings.
JPMorgan’s Bottom‑Line: Valuation, Cash Flow, and the Barbell Play
JPMorgan’s reverse DCF model suggests current IT stock prices embed a terminal growth rate of just 4%, with no sign of a near‑term acceleration. Free‑cash‑flow yields sit at levels reminiscent of the GFC and COVID‑19 market dislocations, implying that investors are demanding a safety premium.
Even under a modest growth scenario—4.3% CAGR for TCS, 4.9% for Infosys, and 5.9% for HCL through FY26—the upside is modest (1‑8% for the three names). A downside beyond 30% would only materialise if terminal growth collapses to zero, an outcome JPMorgan deems overly pessimistic given the emergence of AI‑related services.
The recommended “barbell” approach splits exposure: allocate the core of the portfolio to deep‑value, dividend‑rich caps like Infosys and TCS, while keeping a smaller slice for growth‑oriented firms that are actively building AI practice revenues (e.g., HCL, Tech Mahindra).
Investor Playbook: Bull vs. Bear Cases
- Bull Case: AI adoption accelerates, creating new high‑margin consulting engagements; free cash flow improves; dividend yields remain attractive; IT stocks bounce back with 10‑12% upside over the next 12 months.
- Bear Case: AI automates away a sizable portion of traditional services, margin compression deepens, and global tech sentiment remains bearish; the Nifty IT could slide another 10‑15% before finding a floor.
For investors, the prudent path is to monitor three leading indicators: U.S. tech earnings guidance on AI spend, quarterly revenue mix for Indian IT firms (services vs. AI‑related contracts), and free‑cash‑flow trends. Adjust allocation between deep‑value and growth names as the data evolves.