Key Takeaways
- AI‑driven anxiety knocked heavyweights like Infosys and Tech Mahindra below the 1% mark, but mid‑caps rallied, ending the Nifty IT slump.
- JPMorgan flags high valuations and a "substantial downside" while Macquarie sees a buying window, betting on demand elasticity.
- Global macro—strong US payrolls, a firming rupee, and FPI outflows—are amplifying sector swings.
- Historical parallels to the 2012‑13 low‑code boom suggest AI may create, not destroy, revenue streams.
- Investors should balance short‑term risk (10% downside on large‑caps) against a potential PE rerating after April guidance.
The Hook
You’re probably betting on Indian IT without seeing the AI storm brewing.
Why AI Is Sending Indian IT Stocks on a Rollercoaster
The market’s nervousness began when Anthropic unveiled a legal‑AI add‑on for its Claude chatbot. The headline implied that generative AI could undercut traditional software licensing, prompting investors to question whether Indian service firms can stay relevant. The reaction was swift: Infosys, Tech Mahindra and a handful of peers slipped more than 1%, dragging the Nifty IT index down.
However, the dip was short‑lived. Mid‑cap players such as Coforge and Persistent Systems surged up to 3%, snapping a three‑day losing streak and closing the index in the green at 32,799.90. The divergence underscores a core truth—while the market fears AI, the sector’s fundamentals remain resilient.
Definition: Generative AI refers to machine‑learning models that can produce text, code, images, or other content autonomously, often reducing the need for manual development effort.
Sector Trends: From Low‑Code to Outcome‑Based Pricing
When low‑code/no‑code platforms erupted in 2012‑13, analysts warned of a coding‑price collapse. Instead, Indian firms turned those tools into a growth engine, offering faster delivery and higher billable rates. Macquarie’s Ravi Menon argues that AI is the next iteration of that story. The cost of coding continues to fall, but the value shifts toward outcome‑based contracts—where clients pay for results, not just hours.
Demand elasticity is a key metric. It measures how sensitive revenue is to price changes. Historically, Indian IT has shown high elasticity: a modest price hike can translate into disproportionate revenue growth because of scarce talent and global demand. If AI simply accelerates delivery, firms that re‑price on outcomes could see margin expansion, not contraction.
Competitor Landscape: How Tata, Adani and Others Are Reacting
Tata Consultancy Services (TCS) has already embedded AI into its flagship “Ignio” platform, promising autonomous IT operations. While the article didn’t mention TCS directly, the market’s broader sentiment reflects on the whole “Big‑Four” ecosystem. Adani’s foray into data‑center infrastructure signals a complementary play—providing the hardware backbone for AI workloads, which could indirectly boost IT services demand.
These moves suggest a bifurcation: firms that aggressively integrate AI and outcome pricing may capture market share, while laggards risk margin pressure. Investors should monitor each firm’s AI road‑map, partnership announcements, and the proportion of revenue tied to AI‑enabled services.
Macro Backdrop: US Payrolls, Rupee Moves, and FPI Flows
US labor market data added another layer of uncertainty. A surprisingly strong January payroll report (unemployment at 4.3%) gave the Federal Reserve leeway to keep rates high for longer. Higher rates usually strengthen the dollar, which depresses the rupee and makes foreign portfolio investment (FPI) outflows more likely. Vaqarjaved Khan of Angel One notes that rupee depreciation amplified the sell‑off in IT, a sector heavily dependent on foreign currency earnings.
Conversely, the same data also implied a resilient US economy—good news for Indian exporters because a robust US consumer base continues to fund enterprise IT spend. The net effect is a tug‑of‑war between currency‑driven headwinds and demand‑driven tailwinds.
Historical Context: What the 2015‑16 IT Slump Teaches Us
In 2015‑16, a wave of automation tools threatened offshore coding. The sector’s response was twofold: cost‑cutting on low‑margin work and up‑selling high‑value consulting. Those who pivoted saw their price‑to‑earnings (PE) multiples rebound within 12‑18 months. The current AI debate mirrors that pattern—fear first, adaptation later, and finally, a valuation reset.
JPMorgan’s Rajiv Batra warns that valuations remain stretched relative to earnings, hinting at a “substantial downside.” Yet the historical precedent shows that once firms demonstrate AI‑enabled productivity, the market often rewards them with a PE re‑rating, not a prolonged penalty.
Investor Playbook: Bull vs. Bear Cases
Bull Case (Macquarie View)
- AI tools accelerate delivery, allowing firms to charge premium outcome‑based fees.
- Mid‑cap firms already showing >3% upside indicate a shift toward more agile players.
- April guidance could trigger a sector‑wide PE rerating if top‑line growth beats consensus.
- Demand elasticity remains high; even a 5% price increase could boost margins by 2‑3%.
- Strategic buying on dips (10% downside for large‑caps) positions investors for upside when sentiment normalises.
Bear Case (JPMorgan View)
- Valuations (average PE ~30x) are disconnected from current earnings growth (~8% YoY).
- AI could commoditise routine coding, squeezing margins on legacy contracts.
- Continued rupee weakness and FPI outflows may depress foreign earnings.
- Potential for a 10% corrective move in large‑cap stocks if AI fears persist.
- Macro risk: prolonged high US rates could tighten global IT spend.
Strategically, a balanced approach might involve overweighting mid‑caps with proven AI pilots while trimming exposure to heavyweights that lack a clear AI monetisation roadmap.
Actionable Takeaways for Your Portfolio
- Set a price target for Infosys and Tech Mahindra 10% below current levels as a defensive stop.
- Consider initiating positions in Coforge, Persistent Systems, and other mid‑caps that have outperformed the index in the last week.
- Monitor April earnings guidance; a beat could be the catalyst for a sector PE uplift.
- Use a currency‑hedged vehicle if you’re worried about rupee depreciation eroding foreign‑currency earnings.
- Keep an eye on AI‑related contract announcements—those are the early signals of outcome‑based pricing adoption.