Indian IT sector stocks have been bleeding for the last few days, facing a massive selloff on increasing fears that artificial intelligence (AI) tools and models will hit the basic revenue model of the technology sector. The index tracking Indian IT sector stocks such as Tata Consultancy Services Ltd. and Infosys Ltd. has lost a massive $56 billion in market capitalization after Anthropic PBC introduced a tool that some market participants consider a potential challenge to traditional outsourcing business models.

But is the situation really so bad for the Indian IT sector? Does the future look bleak, or is the scare around impact of AI overdone?

Indian IT Sector Resilient?

According to a Bloomberg analysis, for investors who remain positive about India’s IT services sector, the recent ‘AI scare trade’ has opened a window to accumulate stocks of companies which are viewed as capable of coming out strong amid pessimistic forecasts about the industry’s future.The brutal selloff in Indian technology stocks has been particularly noticeable across Asia, where the region’s strong hardware manufacturing base continues to be regarded as essential to the broader artificial intelligence ecosystem.The NSE Nifty IT Index has declined by about 15% since the announcement made earlier this month by Anthropic PBC, putting it on course for its steepest monthly fall since March 2020. Although technology stocks in China and Australia with significant software exposure have also come under pressure, the drop has drawn particular attention in India, where IT companies have long been regarded as key drivers of the country’s economic growth narrative.Strategists at HSBC Holdings Plc and JPMorgan Chase & Co. believe the concerns may be exaggerated, noting that Indian IT companies could benefit as more enterprises seek assistance in adopting and embedding AI solutions within their operations. Investors such as PPFAS Mutual Fund also argue that the industry has the flexibility to adjust effectively to evolving technological demands.“Whenever a major technological change occurs, IT firms have historically adapted by upgrading skills and aligning services with client requirements,” Raunak Onkar, research head and fund manager at the $17 billion fund house, which increased its exposure to Indian software companies last month was quoted as saying by Bloomberg.He added that these businesses have consistently succeeded by delivering cost-effective expertise at speed.This constructive outlook reflects expectations among some investors that the recent decline in Indian IT stocks could eventually reverse. Globally, tech stocks have borne the brunt amid concerns about how AI-driven tools might affect companies, especially those whose business models rely on delivering efficiency and productivity improvements for clients.India’s IT outsourcing industry first gained global recognition in the late 1990s when it assisted Western corporations in addressing the Y2K problem, a computer-related risk that threatened widespread disruptions at the turn of the millennium. Since that period, these companies have navigated multiple global economic slowdowns and technological transitions, adapting through phases that included the emergence of mobile communications and the expansion of cloud computing.At present, concerns have emerged that advances in artificial intelligence and robotics could undermine the traditional software services model. However, analysts such as Stephen Bersey of HSBC Holdings Plc argue that such assumptions are misguided and lack logical grounding.In a note dated February 9, Stephen Bersey said that software is important for coordinating interactions between AI-generated outputs and the existing enterprise systems. It is crucial to enable smooth digital operations across AI and non-AI components. He is of the view that Indian IT firms have spent decades developing and delivering enterprise-grade software solutions at scale, and this positions them well in this evolving landscape.Despite this optimism, some observers remain cautious. Critics argue that the efficiency gains delivered by AI could ultimately reduce revenue potential for outsourcing firms. According to Phanisekhar Ponangi, co-founder of Mavenark Asset Managers Pvt., the concerns surrounding AI’s impact on the sector should not be dismissed lightly.He said that for nearly three decades, information technology companies built their success on the promise of delivering higher efficiency for clients. According to him, the sector now faces a significant transition as artificial intelligence shortens project timelines and lowers workforce requirements, with “the client will pocket the productivity gains.”

Striking a Note of Caution

Some market experts, however, believe the industry has already anticipated these changes and is positioning itself accordingly. Companies have increasingly highlighted artificial intelligence initiatives during earnings calls and have begun reporting revenue linked to such offerings. In January, Tata Consultancy Services Ltd. stated that its AI-led solutions are generating annualised revenue of about $1.8 billion, with growth of roughly 17 per cent on a quarter-on-quarter basis.Manu Rishi Guptha, a portfolio manager at MRG Capital, said investors may be overlooking two factors that could support Indian IT companies. According to Guptha, strong cash reserves can help firms navigate business model changes triggered by AI. Also, a relatively young workforce is capable of adapting quickly to tech shifts.Guptha added that the recent decline in share prices could represent an opportunity rather than a setback, noting that order inflows have remained steady while valuations have corrected. The Nifty IT index is currently trading at about 20 times forward earnings estimates, marking its lowest valuation level since April 2023.(Disclaimer: Recommendations and views on the stock market, other asset classes or personal finance management tips given by experts are their own. These opinions do not represent the views of The Times of India)