MUMBAI: Indian IT stocks are caught in a curious disconnect. On one hand, companies like Tata Consultancy Services (TCS), Infosys, and HCLTech continue to report healthy deal pipelines, with order books swelling on the back of cloud migration, vendor consolidation, and early-stage AI adoption projects [citation:5]. On the other hand, the Nifty IT index has fallen nearly 17% in the past month, with bellwethers like TCS and Wipro down over 30% from recent highs [citation:3][citation:8].
The question on every investor's mind: why are IT stocks bleeding despite strong business momentum?
- Nifty IT index: Down 17% in one month, worst performance in nearly 10 months [citation:1]
- Wipro: Hit 52-week low of ₹208.25 [citation:1]
- Infosys: Fell 2% to ₹1,338.20 [citation:1]
- Tech Mahindra: Declined 2% to ₹1,454.10 [citation:1]
- Coforge: Slipped 3% to ₹1,318.90 [citation:1]
- L&T Technology Services: Hit 52-week low of ₹3,366.40 [citation:1]
- FPI selling: ₹10,956 crore offloaded in February alone [citation:9]
- Deal pipeline: Strong order intake (e.g., Coforge $593 million, Persistent double-digit TCV growth) [citation:5]
5 reasons behind the underperformance
1. AI disruption fears: The 'existential' question
Generative AI has sparked fears that coding, testing, and maintenance work—the bread and butter of Indian IT—could be automated. Motilal Oswal's Abhishek Pathak estimates that 12-15% of sector revenue faces direct exposure to AI-driven productivity and displacement risk [citation:3][citation:8].
Nomura's Abhishek Bhandari believes these concerns are "oversimplifying the role of IT services companies," noting that large enterprises prioritise risk management and compliance over short-term cost savings [citation:3]. But markets are front-loading the pain before new AI-led business models scale up.
2. R&D investment gap: ₹4.8 lakh crore returned, little reinvested
A report by Aequitas highlights a worrying trend: between FY20 and FY25, India's top five IT companies returned about ₹4.8 lakh crore to shareholders—equivalent to roughly 87% of their combined net profits [citation:3]. TCS alone distributed close to 99% of its earnings [citation:8].
Meanwhile, the share of corporate R&D spending by the Indian IT software sector fell from 4% in FY21 to under 3% in FY24 [citation:3]. This contrasts sharply with global tech majors: Microsoft (13-14% R&D/revenue), Alphabet (15-16%), Meta (over 20%) [citation:8].
3. Global tech sentiment: Weak cues from Wall Street
Indian IT stocks often mirror trends in US tech. Recent weakness in EPAM Systems (after Q4 results) and other technology names has reinforced concerns about slowing demand for digital transformation services [citation:1]. Even Microsoft, despite strong earnings, saw its stock slide on questions about AI monetization and capital intensity [citation:4][citation:6].
As one strategist noted, "We are increasingly seeing a shift from capital-light, high-margin models toward capital-heavy models that require immense capex" [citation:6].
4. FIIs dump IT stocks worth ₹11,000 crore in February
Foreign portfolio investors (FPIs) sold Indian IT shares worth ₹10,956 crore in the first half of February, following outflows of ₹1,835 crore in January [citation:9]. Total FPI investment in IT stocks declined nearly 16% to ₹4,48,938 crore as of February 15 [citation:9].
UBS notes that current valuations imply terminal free cash flow growth of 4-6%, compared with 6-7% a month ago, reflecting heightened investor scepticism [citation:9].
5. Business model transition: From services to AI-led solutions
JPMorgan notes that the IT sector is likely in its third consecutive year of below-par growth during CY23-25, driven by a mix of structural and cyclical factors [citation:9]. The brokerage acknowledges that quantifying the net impact of AI—both deflationary and inflationary—remains challenging [citation:9].
Aequitas argues this is not yet an existential threat, but a transformational one. Companies that fail to evolve towards AI-driven solutions risk margin compression and loss of strategic relevance [citation:3][citation:8].
R&D spend vs shareholder payouts: A stark contrast
Note: R&D as % of revenue (approx). Indian IT data from Aequitas report [citation:3].
Strong deal pipeline: Why it's not helping sentiment
Despite the stock price carnage, the underlying business remains resilient. Choice Institutional Equities notes that most Indian IT services companies demonstrated resilience in Q3FY26, reporting flat to nearly 4% QoQ revenue growth despite seasonal impacts [citation:5].
Coforge secured strong order intake of $593 million and an executable order book of $1.72 billion, up 30% YoY. Persistent Systems maintained momentum with double-digit QoQ TCV growth, driven by BFSI, healthcare, and AI-led engineering [citation:5].
So why the disconnect? Analysts say markets are looking beyond near-term deal wins to the long-term structural shift. "The sell-off reflects front-loading of pains before new AI-led business models scale up," says Nomura's Abhishek Bhandari [citation:3].
R&D spending: Indian IT vs global peers
| Company | R&D as % of Revenue |
|---|---|
| Microsoft | 13-14% [citation:3] |
| Alphabet | 15-16% [citation:3] |
| Meta | >20% [citation:3] |
| Amazon | 10-12% [citation:3] |
| Indian IT sector (FY24) | < 3% [citation:3] |
Expert view: "AI is transitioning from narrative to core driver"
Choice Institutional Equities believes that AI is transitioning from a strategic narrative to a core business driver, with Q3FY26 performance underscoring resilient revenue growth despite seasonal headwinds [citation:5]. Productivity gains are increasingly evident, with EBIT margins showing up to 240 basis points expansion [citation:5].
However, Macquarie's Ravi Menon advises a calibrated, stock-specific stance. He sees the strongest opportunity in TCS (defensive positioning, stable deal pipeline) and HCLTech (engineering services, cloud capabilities) [citation:7]. Among midcaps, Persistent Systems and Coforge are expected to grow faster than large-cap peers, driven by their smaller base and favourable service mix [citation:7].
Wedbush analyst Dan Ives, speaking on the global tech sell-off, argues that the market's AI fears are overdone. He points to 10 potential catalysts that could reverse the slide, including OpenAI's $100 billion funding round, Nvidia's AI commentary, and early signs of AI monetization from Microsoft and ServiceNow [citation:2].
What lies ahead: Growth or disruption?
The IT sector contributes around 7.3% of India's GDP, employs about 5.8 million professionals directly, and accounts for roughly $224 billion in services exports [citation:8]. A prolonged slowdown would affect hiring, urban consumption, and credit cycles in major tech hubs [citation:8].
UBS believes a structural evolution in the business model is both necessary and likely [citation:9]. Companies that successfully pivot to AI-led platforms, invest in R&D, and move up the value chain will emerge stronger. Those that don't risk margin compression and strategic irrelevance.
Key takeaways: AI disruption vs growth
- AI disruption fears are real: 12-15% of revenue at direct risk from automation [citation:3]
- ₹4.8 lakh crore returned to shareholders: Top 5 IT firms paid out 87% of profits, underinvesting in R&D [citation:8]
- R&D spend <3% vs global peers 13-20%: Widening innovation gap [citation:3]
- FPIs sold ₹10,956 crore in Feb: Foreign investors fleeing on structural concerns [citation:9]
- Deal pipeline remains strong: Coforge, Persistent report healthy order books [citation:5]
- Market front-loading pain: Valuations imply 4-6% terminal growth, near COVID-era FCF yields [citation:9]
- Selective opportunities exist: TCS, HCLTech, Persistent, Coforge better positioned [citation:5][citation:7]
Disclaimer: This report is based on provisional closing data. Market conditions are volatile. Please consult your financial advisor before making investment decisions.