Mutual funds held Rs 395,404 crore worth of IT stocks as of January 2026, down from their December exposure of Rs 397,310 crore, as relentless selling gripped the sector, according to data from Prime Database. Oracle Financial Services Software (OFSS), Wipro, TCS and Coforge have all crashed at least 30% from 52-week highs, while Infosys is down 27% and HCL Tech has shed 18%.
ICICI Prudential Asset Management Company led the exodus, offloading an estimated Rs 1,953 crore in Infosys alone during the month, according to the data. The fund house also dumped Rs 783 crore in Tata Consultancy Services (TCS) and Rs 623 crore in HCL Tech. Only Wipro saw buying interest, with both ICICI Prudential Mutual Fund and Quant Mutual Fund adding to their positions.
According to estimates, net selling by all mutual funds in TCS reached Rs 302.53 crore in January, while Tech Mahindra saw Rs 966.71 crore in net outflows and HCL Tech Rs 817.35 crore.
“We expect continued relevance for IT Services, but their position in the tech value chain is softening,” said Ruchi Mukhija of ICICI Securities. “As AI-driven capital shifts toward infrastructure and AI software, services are losing their share of new tech spend. This prolonged period of subdued growth could drive a further derating in valuation multiples.”
Large-cap IT stocks currently trade at 18 times fiscal 2027 estimated earnings, well above historical troughs like the 11-12 times seen during the global financial crisis and initial Covid-19 outbreak, or the 15-17 times average of the fiscal 2013-2017 slowdown, Mukhija noted.
AI’s deflationary grip
The structural threat is stark as generative and agentic AI are delivering immediate productivity gains of 20-40% across core tasks like coding, testing, support, maintenance, and business process outsourcing. This efficiency is eroding IT services’ share of global tech spending, with ICICI Securities projecting an 8 percentage point contraction between calendar 2023-2026 as capital flows toward AI infrastructure and platforms.
Pure-play AI leaders are scaling at “unprecedented rates,” the brokerage said, with OpenAI and Anthropic reaching annual revenue run-rates of $20 billion and $14 billion respectively, backed by over 1 million and 300,000-plus enterprise customers.
“While we believe that these platforms do not replace IT service providers, they are essentially weakening their bargaining power and relevance within the modern tech value chain,” ICICI Securities said.
“IT services may see a growth surge once AI-driven demand outpaces its deflationary effects—but even three years into the AI wave, that tipping point remains elusive,” Mukhija added. “Key monitorables include improvement in profitability per employee, share of new billing models and net new deal TCV.”
Kodak moment for Indian IT?
Motilal Oswal struck a more measured tone, arguing that current valuations may already reflect dire scenarios. The firm’s reverse discounted cash flow analysis suggests the market is pricing in an average 10-year free cash flow compound annual growth rate of just 6.5% which is “among the lowest in the past two decades.”
“This compares to a 40% FCF CAGR in crisis eras such as GFC; a 13% FCF CAGR over FY16-19, when the sector decelerated sharply; and an 8.5% FCF CAGR during FY23-FY26, the latest period of deceleration,” the brokerage said.
On a free cash flow yield basis, large-caps are trading at 5.8% for fiscal 2027 and 6.2% for fiscal 2028 — “levels approaching prior cyclical troughs.”
“The core question is whether AI represents a structural break to terminal growth assumptions or merely compresses growth/margins temporarily,” Motilal Oswal said. “If this is a Kodak moment, then the quantum of downside from here is moot. If it is not, the market is currently pricing an FCF CAGR that is among the lowest in the past two decades.”
Both brokerages acknowledged IT services providers retain critical roles despite AI headwinds. According to ISG, 65% of IT leaders say managing existing data complexity hinders AI progress more than lack of innovation, creating demand for “AI-ready” data architecture that IT services firms can provide.
“New AI tools have accelerated productivity gains but cannot entirely replace the need for IT services,” ICICI Securities said, citing unavailability of AI-ready data at enterprise scale, need for data governance and accountability, and client reluctance to overhaul smoothly running core systems with probabilistic AI platforms.
The brokerage sees potential for a “surge in net-new demand for ERP and legacy code transformations” as AI speeds up refactoring of mission-critical tech stacks. Key areas include legacy code modernization, ERP transformation, replacing point-solution SaaS with AI agents, building AI-ready data foundations, cybersecurity, and physical AI.
“In the long term, answers to whether the industry goes extinct, thrives, or just survives won’t come by easily,” Motilal Oswal said. “In the short term, we stick to forecasting earnings growth for the next two years, which, as shown earlier, seems to be improving.”
JP Morgan analysts argue that it’s overly simplistic to assume that AI can automatically generate enterprise grade software and replace the value IT services firms create across the cycle.
“Indeed, IT Services companies remain the plumbers in the tech world, and if enterprise software/SaaS is rewritten on a bespoke basis by agents – it will need significant services plumbing to work in enterprise context and minimise AI slop,” it said in a recent note.
The brokerage is taking a barbell approach to buy deep value in largecaps like Infosys and TCS, along with growth champions such as Persistent and Sagility.
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(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
