Indian IT stocks are in the news for the wrong reasons.
The BSE IT index is down 15% since 3rd February 2026. Investor sentiment towards the sectors is very low at the moment.
The reason cited is the threat of artificial intelligence (AI) directly impacting business models of these companies.
So long-term investors need to be worried? Or is it a short-term blip?
And what’s the outlook for the IT sector now?
Let’s find out…
BSE IT Index – 1 Year
Source: Equitymaster
Why Indian IT Stocks Are Falling
The big trigger for the recent crash in prices is the following…
US-based AI startup, Anthropic, recently launched new workplace productivity tools capable of automating complex tasks like legal contract reviews and compliance.
This has sparked deep investor anxiety that AI is moving from being a tool for IT companies to a competitor of IT companies, potentially eroding the pricing power of traditional service giants.
India is reportedly the second-largest global user of Claude AI, with a high proportion (50%) of usage dedicated to software development, UI design, debugging, and code tasks, far above global averages.
Anthropic’s tools aren’t just chatbots – they’re being adopted for real technical and software development tasks.
This has led to concerns that the linear billing model of Indian IT firms – clients are billed based on the number of hours worked – will become obsolete.
For decades, Indian IT grew by hiring more people to do more work. Now AI is a serious threat to that business model. If an AI agent can perform the tasks of five junior analysts, a client will no longer pay an IT firm for those five seats.
What is the Big Concern for Investors?
Indian IT companies that don’t pivot to AI-led, outcome-driven models will feel sustained pressure on growth and margins.
Now, all Indian IT companies claim they are already doing this but this needs to be visible in their financials. This is why Indian IT stocks have been under pressure for a while. The recent sharp decline is only due to the trigger.
Earnings growth for top firms has been muted and some delayed deal wins and slower demand in key markets like the US have weighed on valuations.
So, the recent fall isn’t purely a temporary event – it’s part of broader sector weakness.
Rahul Shah on Indian IT Stocks
Writing in the Profit Hunter, Equitymaster’s Co-Head of Research, Rahul Shah, had this to say…
While the numbers are healthy, the qualitative outlook is where the clouds gather. AI represents a fundamental challenge to the “billable hours” model.
Those who emphasize qualitative analysis argue that AI poses a real risk to margins and cash flows. If you cannot put a finger on how these companies will monetize AI-or if they will simply be cannibalized by it-the risk may feel too high, regardless of how “cheap” the stocks look.
For the qualitative investors, waiting for clarity on how the business model survives the AI transition is a prerequisite for entry.
On the other side are the quantitative-leaning investors. A quantitative investor understands that stocks often trade at a discount when fears are at their peak.
They recall that across history, the loudest fears-whether the Y2K bug, the 2008 financial crisis, or the shift to Cloud-often proved overdone.
When the clouds eventually clear, the rewards typically go to those who were willing to bet on the resilient business when no one else would.
For the Indian retail investor, the choice isn’t just about the stock; it’s about the philosophy.
One bets on the proven resilience of an institution. The other bets on the disruptive power of a new technology.
Evaluating Indian IT: The Big Picture
Considering Indian IT stocks is a double edged sword right now.
On one hand, investors who think the AI fear is overblown will have to contend with the possibility of further short-term losses.
On the other hand, investors who believe the Indian IT story is dead are completely ignoring the fact that these companies have rock solid fundamentals. They won’t go bankrupt.
India is the leading IT sourcing destination in the world, with a market share of about 55%.
India’s IT industry estimates that it’s likely to hit the US$ 350 billion (bn) revenue mark by 2026 and contribute 10% towards the country’s GDP. These estimates also say that the industry on track to achieve a revenue of US$ 500 bn by 2030.
This position has been achieved through a combination of cost arbitrage, high-quality and reliable services delivery, as well as strong domain experience, and client relationships built over the years.
And these firms are not resting on their laurels. They have entered into strategic alliances in many industries, to strengthen their competitive positions.
Indian IT companies are also focusing on newer models such as platform-based services and creation of intellectual property to move the value chain. These efforts have been going on for years – long before AI was a threat – and will continue in the future as well.
The Future
The ever increasing use of AI is directly tied to the slowdown in technology spending in the western world. Partly this is explained by macro factors but the widespread use of AI is also playing its part.
Across industries, clients of Indian IT companies are shifting their focus from relatively simple AI use cases to more complex AI applications to justify their return on investment.
Indian IT companies have invested considerable time and money to get the entire workforce AI ready so as to be prepared for this disruption.
The industry’s future revenue growth will depend a lot on how it fulfills the demand for AI-related services in the face of intense competition.
And that will decide the future of the stock prices of these companies.
Conclusion
Investors considering IT stocks should ideally broaden their horizons. Consider technology stocks as a whole, instead of limiting one’s options to just software.
Technology stocks are not just limited to the IT industry but encompass many other new technology company stocks.
Several other industries make up the technology space and companies are sprouting up in defence technology, semiconductors, and sustainable technology.
These are also newer fields like cybersecurity, AI and IoT as well. Technology applications are almost limitless and expanding into different areas.
Thus, keeping an open mind and digging deep into the ecosystem will likely result in more opportunities for an enterprising investor.
Investors should evaluate the company’s fundamentals, corporate governance, and valuations of the stock as key factors when conducting due diligence before making investment decisions.
Happy investing.
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