IT stocks witnessed strong gains in intraday trade on Tuesday, February 17, boosting their sectoral index, Nifty IT, by almost 3% during the session. Stocks such as Infosys, HCL Tech, Wipro, Tech Mahindra, and TCS clocked healthy gains as sentiment improved after Infosys announced a strategic partnership with Anthropic to create and implement advanced enterprise AI solutions for businesses.
The IT sector outlook
The tech sector is in turmoil due to AI-led disruptions, as concerns persist that rapid advances in artificial intelligence will make traditional IT services redundant, posing a strong blow to Indian IT companies.
However, this could be an overblown concern, according to experts. This is because AI is rapidly evolving, and no one can answer in black and white at this juncture how the technology will shape the industry.
“AI will render much of legacy software and testing redundant. Just like hyperscalers were initially a significant headwind to infra management services (IMS), and BPO got disrupted in the earlier cycle (2015),” said brokerage firm Motilal Oswal Financial Services in a report earlier this month.
However, the brokerage firm added that “AI-native firms will eventually leverage the enterprise relationships and context knowledge of IT vendors, who will turn out to be
channel partners. This is a crucial monitorable over the next one year.”
Motilal says in the long term, answers to whether the industry goes extinct, thrives, or just
survives won’t come by easily. For the medium term, getting to AI should be a revenue-accretive opportunity, says the brokerage firm.
According to brokerage firm Equirus Securities, the recent sharp correction in the IT sector reflects extreme pessimism driven by cannibalisation concerns and largely ignores the possibility of new opportunities for ISPs.
Is it the right time to buy IT stocks?
Experts say investors may consider some large and mid-cap IT stocks for the long term, as valuations have come down.
“For the long-term perspective, one can consider some IT stocks as valuations have dropped,” said Pankaj Pandey, the head of research at ICICI Securities.
Pandey, however, added quickly that there are clouds of uncertainty in the sector due to the AI factor. This requires a tactical and stock-specific approach for the sector.
Vinod Nair, the head of research at Geojit Investments Limited, too, believes investors can start buying gradually.
“Valuation-wise, IT stocks are looking attractive, especially from a long-term investment perspective. However, in the short term, the outlook remains weak, so one should not expect a sharp rebound immediately,” said Nair.
Nair highlighted that the biggest concern surrounding IT stocks is that the overall business outlook for the sector continues to remain weak. Even though recent developments around AI are positive, there are still uncertainties about how AI adoption will impact pricing.
Nair said AI could reduce project timelines and potentially bring down the size of deals. This may also reduce the number of employees required for projects, impacting billing and manpower utilisation. Additionally, the use of AI platforms—such as Anthropic and similar applications—will also add costs.
“The near-term outlook is likely to remain weak for another two to three quarters, similar to what has been seen in the current quarter. Long-term investors can start shifting into IT stocks gradually. Buying slowly over time makes sense. This approach applies to both large-cap and mid-cap IT stocks. However, for mid-tier companies, the outlook remains mixed, and investors need to be stock-specific,” said Nair.
Equirus Securities prefers Infosys, TCS, HCL Tech, and Tech Mahindra among large caps, Mphasis and Zensar amongst mid-caps, and KPIT within ER&D on a relative basis.
“Higher than expected impact from AI is a key downside risk amongst others,” said Equirus.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
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