Navigating Turbulence: Indian IT Stocks Amid AI and Restructuring Pressures
The Indian IT sector is currently navigating a period of significant uncertainty, marked by a confluence of challenges including mass layoffs, artificial intelligence (AI)-driven restructuring, and muted growth prospects. This has led to a notable decline in IT stocks, with the Nifty IT Index underperforming broader market indices. However, sector giants Tata Consultancy Services (TCS) and Infosys remain cautiously optimistic, signaling potential shifts in the industry's trajectory.
Market Performance and AI-Induced Volatility
In 2025, the Nifty IT Index fell by 12.6%, starkly contrasting with the Nifty 50 Index's rise of 10.5%. This underperformance was exacerbated by concerns over the sector's lag in the AI race, issues surrounding H-1B visas, US tariffs, and widespread restructuring efforts. A significant trigger for recent volatility came from Anthropic, a US-based AI startup, whose innovations questioned the relevance of traditional IT services, causing the Nifty IT Index to drop 7.3% over two days in February 2026.
As a result, TCS and Infosys experienced sharp declines, with each falling around 9% during this period, adding to their 2025 dips of 21% and 16%, respectively. This correction has pushed their valuations below historical medians, with Infosys trading at a price-to-earnings (P/E) multiple of 21.2x and TCS at 20.8x, compared to their 10-year medians of 22.8x and 26.7x.
AI Disruption: Threat or Opportunity?
AI is fundamentally reshaping the IT landscape, particularly in process-driven tasks. Anthropic's Claude Cowork tool, which automates legal functions like contract review and compliance management, exemplifies this shift. While designed to enhance productivity, it has sparked investor anxiety over the potential disruption to Indian IT services, which heavily rely on standardized, labor-intensive processes.
This disruption may force companies to abandon the traditional pyramid model in favor of outcome-focused pricing and partnerships with AI-native firms. Union Minister Ashwini Vaishnaw highlighted India's strategy at Davos 2026, focusing on developing efficient AI models rather than expensive large ones, aiming to boost productivity across sectors.
Historical Context and Cyclical Trends
Historically, IT stocks like TCS and Infosys have demonstrated resilience through technological disruptions and economic cycles. Over the past 15 years, TCS has navigated four growth cycles, including recoveries from the global financial crisis and pandemic-led digital transformation. Similarly, Infosys has weathered downturns, such as the dot-com bubble, by realigning workforces and reskilling employees.
The current phase follows a post-pandemic slowdown, with Infosys projecting FY26 revenue growth of 3%-3.5%, up from earlier guidance. Historical patterns suggest IT spending slowdowns average three years, raising questions about whether the downturn is nearing its end.
Workforce and Deal Activity Insights
Workforce trends reveal divergent strategies: TCS reduced its workforce by 31,000 in FY26 to integrate AI, while Infosys added 13,000 employees in calendar 2025 and plans to hire 20,000 freshers in FY26. Both companies are investing in reskilling to meet evolving client demands.
Deal activity also shows contrasts. Infosys reported a 53% surge in its order book for FY25, with strong momentum in Q3 FY26, including a large contract from NHS UK. TCS, however, saw an 8% decline in its order book for FY25 and a 7% sequential drop in Q3 FY26. Despite Infosys's deal wins, its margins have been pressured by hiring investments, lowering return on equity (ROE) to 29% from 32.1% in FY24, whereas TCS increased its ROE to 52%.
Future Prospects and Analyst Outlook
Both TCS and Infosys report robust demand from Europe and stable interest in North America, with growing client focus on AI-driven return on investment (ROI). TCS disclosed annualized AI revenue of $1.8 billion as of Q3 FY26, accounting for 5% of total revenue, while Infosys has over 4,600 AI projects in the pipeline.
Analysts anticipate an AI-led recovery, with Motilal Oswal expecting AI-related deals to impact revenue by H2 FY27. Macquarie and Motilal Oswal project TCS to reach previous highs, while CLSA remains cautious due to order declines. Infosys maintains a Buy rating, supported by AI integration efforts, though margin pressures persist.
As AI evolves from an indicator to a structural growth driver, the next two years could be pivotal for Indian IT stocks, defining their adaptation to new technologies and market dynamics.
