As AI roils shares of India's largest IT firms, their share in Sensex falls to lowest in 18 years
The weight of IT services stocks in the benchmark BSE Sensex has dropped to 11.3%, the lowest in 18 years, as the rise of AI and an uncertain growth outlook make investors wary. Analysts believe this is a potential investment opportunity, expecting growth recovery from 2026.
India's $283-billion information technology sector is no longer the big hitter in its leading stock market indices, reflecting the industry’s continued struggle to navigate artificial intelligence, automation, and enduring labour mobility hurdles in the US.
The combined weight of IT companies in the BSE Sensex has plummeted to an 18-year low, Bloomberg data shows, while their share in the broader Nifty 50 index languishes at a decadal trough. IT stocks now command just 11.3% of the Sensex weight, the lowest level since falling to 8.8% in 2007. Four of the top five IT stocks figure in the Sensex, Tata Consultancy Services Ltd, Infosys Ltd, HCL Technologies Ltd, and Tech Mahindra Ltd; Wipro Ltd, once a stalwart, was removed from it last year.
The recent slide has aligned with the November 2022 launch of OpenAI's ChatGPT, an event seen as an inflection point for the country's roughly $283 billion IT services sector. This innovation, coupled with the relentless rise of automation and persistent visa issues constraining labour mobility in the US, has upended traditional business models, slowed revenues and moderated stock prices, ultimately lowering their index weights. The steep decline marks a significant erosion from a late-2021 peak, when IT stocks constituted approximately 18.56% of the index.
Days of decline
The downturn is equally pronounced in the Nifty. "We note that IT services' share in Nifty profits has been stable at 15% for the past four years, whereas its weight in the benchmark index is now at a decadal low of 10% (versus a 19% peak in Dec '21)," observed analysts Abhishek Pathak, Keval Bhagat, and Tushar Dhonde of Motilal Oswal Financial Services in a recent note.
The fall in index weightage is a direct consequence of a relative decline in the market capitalization of these tech giants. A company’s index weight is calculated by dividing its market cap by the total market cap of the index. Lower weight implies a relative underperformance in share price compared to the rest of the index.
Since the start of the year, shares of the five largest firms have seen sharp drops: TCS fell by 23.47%, Infosys 17%, HCLTech 14.74%, Wipro 17.14%, and Tech Mahindra 9.97%. In contrast, the BSE Sensex gained 8.64% over the same period, illustrating the sector’s struggle for investor confidence.
The financial health and growth outlook of the companies have also taken a hit, evidenced by their price-to-earnings (P/E) ratios hitting multi-year lows—TCS (23.7 P/E) and Infosys (24.4 P/E) are trading at their lowest levels in at least five years, while HCLTech (25.8 P/E) and Wipro (20.3 P/E) are at three-year lows.
P/E pain
A lower P/E ratio, which measures the share price relative to earnings per share, signals a weak growth outlook and diminished valuations. This is an investor-led verdict on the industry's near-term prospects.
Amit Chandra, vice-president of HDFC Securities, attributes the decline to a confluence of factors: "Automation, geopolitical uncertainties, weak discretionary spending and fewer number of big ticket deals have impacted growth for the IT players and this led to decline in weightage." Discretionary spending, non-essential projects by clients, is a critical growth driver for the sector, and its pullback underscores client caution.
Beyond economic cycles, analysts point to a deeper structural challenge: the inability of traditional IT outsourcers to rapidly adapt to the GenAI-led shift.
Phil Fersht, CEO of HFS Research, argues that the low weight signals a "market recalibrating expectations during a major technology transition." "Automation and new delivery models are disrupting the traditional services engine. Investors want to see how fast these firms can convert automation into new revenue streams rather than pure cost take-out. The lower weight reflects the belief that the next phase of value creation in IT services will look very different from the last 20 years."
GenAI's "deflationary impact" is already eating into revenues, with automation tools replacing manual labour and leading to fewer billable hours. This dynamic contributed to the Big Five growing at their slowest collective pace in over a decade last fiscal year. While TCS, Infosys, and HCLTech managed single-digit annual revenue growth, Wipro and Tech Mahindra saw marginal declines, struggling with uncertain demand from major clients like JPMorgan Chase & Co. and Microsoft Corp.
Automation overhang
Thomas Reuner, principal analyst at Pierre Audoin Consultants, stressed the need for a fundamental strategic pivot. "Indian service providers have to adapt to the long-term trend of decoupling service delivery from labour arbitrage," he stated, adding that while automation is an ongoing shift, the scaling of "Agentic AI"—AI capable of decision-making with minimal human intervention—is moving slower than commentators often suggest.
Despite the current headwinds, a segment of the brokerage community views the present lows as a potential buying opportunity, betting on an eventual AI-driven recovery.
Motilal Oswal analysts believe the risks "skew to the upside," arguing that current valuations "already bake in the status quo (GenAI-led deflation, demand apathy)." They project a significant growth recovery beginning in September 2026, "as enterprises enter full-scale AI deployment."
HDFC's Chandra echoed this optimism, predicting a new tech cycle will drive investor interest. "There was capital expenditure on data centres and AI infrastructure in the US. Now, companies need applications to run these centres and this is where system integrators will be needed," he said.
Furthermore, expected macroeconomic shifts in the US could provide a vital tailwind. Pramod Gubbi, a co-founder of Marcellus Investment Managers, expects a rally driven by anticipated lending rate cuts by the US Federal Reserve. "The US Fed is more inclined to cut rates and these have typically favoured a rally in IT shares as enterprises are expected to loosen purse strings for more IT upgradation," Gubbi noted. Lower borrowing costs allow clients to finance larger, transformative tech projects, including the crucial embedding of AI solutions.
For now, industry heavyweights like Infosys (5.49% Sensex weight) and TCS (3.17%) remain the largest components, but their dominance is being challenged. Investors are keenly watching to see which firms can successfully transition from being service providers focused on labour-arbitrage to becoming strategic partners in the age of generative AI.
topics
