Kolkata: The entire Indian IT sector, which led shine to India’s image to the outside world, is in the grip of a free fall in the market, recording an unthinkable eight weeks of downslide and evaporating close to Rs 8 trillion of market cap. While the slide began with AI-led fears upsetting the traditional headcount-based IT delivery model of legacy IT companies, some experts are wondering what is fueling this massive slide. In Feb 20% crash was reported, which is said to be the sharpest fall since the 2008 financial crisis. Needless to say, some are sniffing fresh buying opportunity in this mayhem.
Combined market cap and the fall
Today, March 13, could mark the eight week of continuous slide of the Nifty IT index, one of the most busy indices in the past several years and which has added to investor wealth massively in this century. Amid continuous selling pressure, reports have put the cumulative market cap to under Rs 25 lakh crore of all 10 Nifty IOT stocks. These companies are TCS, Infosys, Tech Mahindra, HCL Tech, Wipro, LTI Mindtree, Persistent Systems, Coforge, Oracle Financial Systems and Mphasis.
Just for perspective, the peak market cap of TCS was recorded on January 17, 2022, when it reached $200.15. Using the exchange rate prevailing then, the amount was Rs 14.81 lakh crore.
FIIs fled in Feb
One of the triggers of the massive selling pressure on IT stocks was the impact AI firm Anthropic rolling out new tools for its Cowork product saying that it could deliver in hours what traditional` IT companies could deliver in weeks and months. Software stocks declined sharply in the US and it triggered an exodus of foreign investors who with investments worth Rs 17,000 crore in IT shares alone in Feb. However, PPFAS Flexicap Fund saw buying opportunity in this meltdown and bought 1.9 million shares of TCS, 4.2 million shares of Infosys and 4.3 million shares of HCL Tech.
Worst-case scenario
Major US brokerage Jefferies is one of those who are doubters. It has said AI “may structurally change IT business mix towards consulting/implementation while shrinking managed services. This would not only increase cyclicality but also require a change in talent/operating model—thus adding risks.” Jefferies has also spelt out what it believes to be the worst-case scenario. It predicted that there could be a reduction in the valuation multiple. PE multiples suffer lower valuations to the extent of 10-35% for big IT firms and about 15% for mid-sized companies, said the brokerage.
Jefferies has also downgraded stocks such as Infosys, HCL Tech and Mphasis and issued Hold signals. TCS, LTIMindtree and Hexaware were assigned Underperform ratings. Target prices were slashed too.
Emkay Global too lowered earnings estimates for FY27-FY28 by 1% and 2% respectively. That of BPO companies was slashed by 20%-32%. Axis Mutual Fund maintained underweight stance and pointed out that relative valuations of Indian IT stocks compared to global peers appeared high.
Nuvama adopts contrarion position
However, one agency to think otherwise is Nuvama. “We see no existential threat from Gen-AI, as we believe the requirement for a system integrator—which can customise an enterprise’ plug-and-play software’s input and output as per its requirements—shall always exist,” Nuvama mentioned.
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