India's IT Sector Faces Prolonged Sell-Off, Losing Streak Hits Eight Weeks
The Indian information technology sector is bracing for its eighth consecutive week of losses, a relentless downturn that has wiped out nearly Rs 7.7 lakh crore in market value. This extended slide has sparked a fierce debate among investors: does the decline signal a structural disruption driven by artificial intelligence, or does it present a rare buying opportunity after a steep correction?
Historical Context and Recent Performance
The Nifty IT index is poised to end Friday in negative territory for the eighth week in a row, pushing the total market capitalisation of its ten constituent companies below Rs 25 lakh crore. According to an ET report, this prolonged sell-off has significantly eroded investor wealth, with the pace of decline rarely witnessed outside major market downturns.
However, historical patterns suggest that extended losing streaks in the sector have sometimes been followed by swift rebounds. For instance, in April and May 2022, the index declined for eight straight weeks before recovering 4.4% in the following week. Looking further back to July 2008, a similar pattern emerged when a seven-week fall was followed by gains of approximately 3–5% in the next week. Even the longer 12-week slide between January and mid-April 2001 eventually concluded with a notable jump.
Foreign Investor Exodus and Domestic Contrarian Moves
The latest downturn accelerated in February when foreign institutional investors sharply reduced their exposure to IT stocks. Data from NSDL reveals that foreign investors sold shares worth about Rs 17,000 crore during the month. This outflow occurred in two distinct phases: around Rs 11,000 crore in the first half of February and another Rs 5,993 crore between February 15 and 28.
While overseas investors exited the sector, one prominent domestic fund moved in the opposite direction. The PPFAS Flexicap Fund, which manages assets of Rs 1.34 lakh crore, adopted a contrarian stance and increased its holdings in several IT majors during the decline. Portfolio disclosures for February showed the fund purchased 4.3 million shares of HCL Tech, 4.2 million shares of Infosys, and 1.9 million shares of TCS. This buying activity took place during a month when IT stocks tumbled approximately 20%, marking their steepest monthly drop since the 2008 global financial crisis.
Divergent Brokerage Outlooks: AI Threats vs. Buying Opportunities
Brokerage houses remain sharply divided on the sector’s outlook, reflecting the broader investor uncertainty.
Bearish Perspectives:
- Jefferies warned that artificial intelligence could fundamentally reshape the structure of the IT services business. The brokerage stated that 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." The firm cautioned that in a worst-case scenario, stock valuations could decline by another 30–65%, with Wipro having the lowest downside risk and Coforge the highest. Even under more moderate projections—including a 3% reduction in growth during FY26–FY36 and 1% lower terminal growth—price-to-earnings multiples could still fall by 10–35% for large IT companies and up to 15% for mid-sized firms. Consequently, Jefferies downgraded several stocks: Infosys, HCL Tech, and Mphasis were moved to Hold, while TCS, LTIMindtree, and Hexaware were downgraded to Underperform. The brokerage also cut price targets by up to 33%, asserting that IT stocks currently present more downside risk than upside potential.
- Emkay Global has also turned cautious, lowering its earnings estimates for FY27 and FY28 by 1% and 2%, respectively. It reduced target valuation multiples for IT services companies by about 20% and for BPO firms by roughly 32%, citing "conservative assumptions on required terminal growth."
- Axis Mutual Fund has maintained an underweight stance on the sector due to cautious demand conditions in the United States. The fund noted, "While rupee depreciation and attractive absolute valuations offer some comfort, relative valuations versus global peers remain elevated."
Bullish Counterpoints:
- In contrast, brokerage Nuvama has adopted a more optimistic view, arguing that concerns about the decline of traditional software services are overstated. Quoting Mark Twain's famous remark that "Reports of my death are greatly exaggerated," the brokerage stated that fears around the sector’s long-term viability are misplaced. Nuvama explained, "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. We also note B2B adoption of any technology is very different from that of the B2C segment. Eventually, enterprises going for automation of tasks shall still need someone to take ownership of the system—and that will be IT Services firms." The brokerage acknowledged that IT services companies may experience revenue cannibalisation in the early phase of the shift, something it believes is already happening, before reaching an inflection point. After that, the opportunity could expand the sector’s total addressable market to $300–400 billion by 2030, according to projections cited from Infosys management. Nuvama also highlighted that the recent correction has significantly improved valuations: "Post the recent sharp correction, we find the valuations of all stocks highly attractive," adding that reverse DCF calculations indicate very low terminal growth expectations. Following this perspective, the brokerage upgraded HCL Tech, Wipro, TechM, and Hexaware to Buy and now holds a bullish outlook on all the top 10 IT stocks.
Conclusion: A Sector at a Crossroads
As the IT sector endures its longest losing streak in years, the debate among investors has intensified to a fever pitch. On one side, warnings persist that artificial intelligence could reshape the industry and pressure valuations further. On the other, many view the sharp correction as a potential opportunity, citing attractive valuations after a steep fall in prices. The coming weeks will be critical in determining whether this downturn marks a structural shift or a cyclical buying moment for India's once-dominant tech sector.
