Indian IT stocks take a beating as AI automation tools signal an agentic shift

Shares of TCS, Infosys, HCLTech, Wipro, and Tech Mahindra were down 6.95%, 7.19%, 4.22%, 3.73% and 4.12%, respectively at market close on Wednesday, while the Sensex was largely flat at 83,817.6 points.

When Palantir announced its earnings on Monday, it revealed that its Hivemind AI can now autonomously migrate data from ageing legacy systems—a task that has been a bread-and-butter revenue stream for Indian IT firms for decades.

Before that, generative AI startup Anthropic sparked anxiety last Friday, when it upgraded its Claude Cowork AI agent with specialized plug-ins designed to automate core business functions. These updates allow the agent to move beyond simple conversation and execute multi-step workflows directly within a company's files and apps. For instance, the new tools can autonomously track, review, and summarize legal documents, or link directly to data dashboards and spreadsheets to analyze trends and generate financial models.

All of this caused an overnight sell-off in shares of Infosys Ltd and Wipro Ltd on the New York Stock Exchange on Tuesday. Infosys shares fell 5.56% to $17.32, while Wipro shares fell 4.83% to $2.56 before their Indian counterparts went into freefall on Wednesday morning.

'Stocks will be compressed'

Fractal co-founder Srikanth Velamakanni attributed the fall in Indian IT services stocks to the new AI automation tools. “In India, a lot of enterprise services rely on unstructured data. Those stocks are clearly going to be compressed because AI models are increasingly doing an amazing job of interpreting unstructured data – video, voice or text," Velamakanni said in reply to a query from Mint.

“Any service that is about processing these data sources will get compressed and will get impacted. A lot of the work that tech services companies do is around working with structured data in a very complex enterprise context. So they will be protected a little bit more, but their stocks also might see some correction in the short term," he added.

Fractal provides AI solutions such as customer relationship management analytics, cognitive automation, quantum computing, and machine learning operation services. Its clients range from financial services and health to insurance and retail markets worldwide, and 65% of its revenue comes from the US market. Its revenue jumped 26% on a yearly basis to ₹2,765 crore ($306 million).

Uncertain times

The freefall in IT stocks is also partly due to heightened uncertainty amid low demand for their services. Tariff flip-flops by US president Donald Trump and geopolitical tensions around key trade routes in the Middle East have prompted Fortune companies to reduce their tech spends and divert the funds to their primary businesses. This is reflected in the muted growth of India’s largest IT services firms, which are now staring at a second consecutive year of sub-5% growth at best.

However, experts said the decline was primarily due to the rise of AI automation tools, which could reduce the demand for humans in tasks such as coding, software development and maintenance, effectively shrinking the billable hours for Indian IT companies.

At least one brokerage said that automation was likely to limit the sector’s growth. “AI is likely to limit growth in the IT services market to 1.5%-3% CAGR over 2024-29 due to three key reasons. (1) Clients may delay IT spends on concerns of rapid AI advancements rendering current investments obsolete. (2) AI-led productivity gains may impact existing IT services revenues by 20% over FY25-30, while growth opportunities arising from AI may be back-ended. (3) Clients have not fully realised ROIs on elevated incremental tech. spends of $280 billion on average over 2021-24 versus $130 billion over 2016-20," Jefferies analysts Akshat Agarwal, Surinder Thind and Ayush Bansal said in a note dated 11 September.

The crash in IT stocks on Wednesday stands in stark contrast to 30 November 2022, the day ChatGPT was launched. That day, shares of TCS and HCLTech declined 0.1% and 0.65%, respectively, while shares of Infosys, HCLTech, Wipro, and Tech Mahindra were up 0.25%, 0.43%, up 0.19%, respectively. Since then, shares of TCS, Infosys and Wipro are down 2.1%, 4.5%, and 14.8%, respectively, while shares of HCLTech are up 44% and those of Tech Mahindra are up 52%. The BSE Sensex has gained 33% over this period.