Foreign Institutional Investors Abandon Indian IT Sector Amid AI Concerns
A significant withdrawal is underway as foreign institutional investors (FIIs) divest approximately ₹17,000 crore worth of Indian software stocks solely during February.
This alarming trend is largely driven by apprehensions that artificial intelligence could potentially render conventional software services antiquated.
The latter half of the month saw particularly intensified selling, with FIIs offloading ₹5,993 crore in IT stocks from February 15 to 28, following a staggering ₹11,000 crore sell-off in the initial two weeks, as reported by NSDL data.
Consequently, the Nifty IT index has plummeted by 20% year-to-date, rendering it one of the poorest-performing sectors in 2022.
The intense market downturn is occurring simultaneously with global brokerages revising earnings forecasts and price targets downward, cautioning that AI advancements may fundamentally transform the industry’s business model and incite further deratings of up to 65%.
Brokerage Downgrades and Industry Analysis
Jefferies has meticulously depicted a dismal forecast for the sector, asserting that AI “might structurally alter the IT business composition towards consulting and implementation, while concurrently minimizing managed services.”
This scenario not only heightens cyclicality but also requires an ambitious evolution in talent and operational frameworks, thereby introducing additional risks.
A myriad of stocks, including luminaries like Infosys, HCL Tech, and Mphasis, have been downgraded to Hold, with titans such as TCS, LTIMindtree, and Hexaware relegated to Under-Perform status, along with price targets slashed by as much as 33%.
Jefferies remarked, “Despite a 16% decline year-to-date, these stocks present greater downside than upside potential.”
In a dire prediction, Jefferies warned that shares could see further derating ranging from 30% to 65%, with Wipro exhibiting the least and Coforge the greatest eroding potential.
Even with modest growth reductions of 3% anticipated over FY26-36 and a 1% dip in terminal growth expectations, price-to-earnings multiples could still sag by 10% to 35% for large IT conglomerates, and up to 15% for medium-sized enterprises.
Broader Market Dynamics
Emkay Global has adopted a cautious position, trimming earnings forecasts for FY27 and FY28 by 1% and 2%, respectively, across the industry landscape, incorporating conservative growth and margin assumptions.
The brokerage has significantly reduced target multiples for IT services and BPO firms by approximately 20% and 32%, respectively, in response to a more cautious outlook on terminal growth.
The FIIs’ withdrawal has not been limited to the IT sector; they have also sold ₹5,238 crore in consumer services stocks and ₹1,775 crore in telecom stocks during February’s latter half.
Conversely, they have shown a propensity for net purchases in capital goods, automotive, construction, metals, power, and financial segments—indicating a preference for sectors aligned with India’s infrastructure and consumption narratives, rather than those susceptible to AI disruptions.
Contrarian Perspectives Amidst Uncertainty
Not all analysts harbor pessimism regarding the sector. Nuvama adopts a contrarian stance, positing that “the Indian IT Services industry will emerge robust from the generative AI upheaval, with a net expansion in its total addressable market—paralleling previous technological disruptions.”
The firm maintains a favorable outlook for the sector in the medium to long term, albeit acknowledging potential short-term volatility.
Despite the prevailing turmoil, Jefferies identifies selective opportunities, listing Coforge, Sagility, and IKS Health as their top picks within the sector.
The divergent perspectives encapsulated in this discourse highlight the pervasive uncertainty enveloping India’s $250 billion IT services sector as it encounters its most monumental technological disruption since the ascendance of cloud computing.
The question of whether AI will act as an extinction event or a stimulant for growth remains pivotal in determining the fates of countless Indian software professionals and the investors retreating from the sector.
Source link: M.economictimes.com.
