Doomsday or deep value: India's IT stocks at crossroads after 20% crash

India's Nifty IT index, which represents the top 10 software services companies listed on Dalal Street, is ending February down about 20% to remind investors of the September 2008 collapse when Lehman Brothers was taking the global financial system down with it. And unlike 2008, there is no single shock event to point to but just a slow, grinding fear that artificial intelligence is about to make the $250 billion Indian IT model obsolete.

But in the previous two sessions, the index crept back into positive territory, and suddenly the debate has changed from how bad can it get, to whether the worst is already priced in.

The bull case

Emkay Global has been among the most forceful in calling a bottom. "IT sector valuations are too attractive to ignore as the market has over-reacted to the AI threat," it said, turning marginally overweight and calling this "a good entry point." The brokerage sees value emerging at 14–18x P/E and a 4–6% free cash flow yield, with potential three-year returns of 13–25% in a bull case. It replaced Mphasis with Infosys and HCL Tech in its model portfolio.

Emkay is clear-eyed about the limits of its optimism. "This is an opportunistic call — we recognize the lack of structural growth in the sector, and investors should play the ranges," it said, projecting long-term sector growth remaining sub-5%. But it pushed back hard against the doomsayers: "Much of the doomsday analysis focuses on static analysis, with IT Services losing share to the AI ecosystem and AI agents replacing human beings. This ignores the impact of AI on the overall pie. AI is likely to spawn many more use cases and push companies to look for solutions that were hitherto unviable with pure human coding."

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CLSA echoed the constructive tone on TCS specifically, reiterating an Outperform with a target price of Rs 3,593 anchored by a 6% free cash flow yield, a likely Rs 35 Q4 dividend, and the possibility of a share buyback following budget changes on buyback tax treatment.

JM Financial joined the selective optimists, preferring Infosys among large-caps, Mphasis among mid-tiers, and Sagility among BPO names, though with a crucial caveat that sector re-rating is unlikely, till the concern about terminal growth remains.

The bear case

Not everyone is convinced the floor has been found. Alok Agarwal, Head of Quant and Fund Manager at Alchemy Capital Management, delivers perhaps the most sobering assessment.

"The Nifty IT Index trades at an eight-year low relative to the Nifty 500 — a valuation discount that's drawing attention from contrarian investors," he said. "But before rushing into what appears less expensive, long-term investors may have to confront uncomfortable realities about this sector's trajectory."

His core argument is that AI anxiety is layered on top of a pre-existing condition. "The weakness predates AI anxiety. Over the last 3, 5, and 10 years, the IT sector's earnings growth has remained in single digits or barely scraped into double-digits. This isn't a temporary disruption, in our view; it's sustained underperformance reflecting genuine business model pressures — commoditisation of services, pricing pressure, and sluggish demand from key Western markets."

On AI, he pulls no punches: "Generative AI isn't just another technology shift; it threatens to fundamentally alter how code is written, tested, and maintained. The labour arbitrage model that powered Indian IT's rise faces structural obsolescence as AI tools enable clients to accomplish more with fewer engineers."

He also warns investors against being seduced by yield metrics. "While they may offer high dividend yields, attractive free cash flow yields, and elevated payout ratios, these metrics are backward-looking. If growth erodes further, cash generation suffers, and those compelling yields may become unsustainable."

His verdict is stark: "The valuation discount exists for a reason. Until Indian IT companies demonstrate concrete strategies to reinvent themselves... the risk-reward may remain unfavourable even on a 4–5-year horizon."

Mayur Patel of 360 ONE adds a similar note of caution with a more nuanced framing. "Valuations of several incumbents already imply muted long-term growth, reflecting scepticism about the durability of labour arbitrage-led delivery models. While this may appear conservative, valuation comfort alone is unlikely to drive a rerating." He draws a sharp distinction within the sector itself: "Incumbents anchored to legacy delivery models are more exposed, while challengers with stronger digital and AI-native capabilities are better positioned to gain share. Companies must demonstrate that AI expands their addressable opportunity rather than simply compressing billable effort."

Warning that artificial intelligence-related pain isn't over yet, global brokerage firm Jefferies has turned sharply cautious on Indian IT stocks and downgraded Infosys, Tata Consultancy Services (TCS), HCL Tech, Mphasis, LTIMindtree and Hexaware. It also cautioned investors that in the worst-case disruption scenario, sector valuations could see another 30–65% derating from current levels.

"AI may structurally change IT business mix towards consulting/implemenation while shrinking managed services. This would not only increase cyclicality but also require a change in talent/operating model - thus adding risks. Despite their 16% fall YTD, stocks still offer higher downside than upside," Jefferies analysts, including Akshat Agarwal, said in a note.

The valuation gap

JM Financial frames the structural tension precisely. TCS and Infosys still trade at 17x one-year forward consensus EPS — a premium to Accenture at 14x, Cognizant at 11x, and Capgemini at just 8x. The question of whether that premium is justified, or whether Indian IT is slowly being dragged toward global peer multiples, is arguably the most consequential valuation question in Indian equities right now.

JM attributes the historical premium to domestic fund flows, INR depreciation benefits, and limited investment alternatives for Indian retail investors — structural supports that may be weakening. "Valuations remain skewed in the near term, but generally normalise to growth visibility in the medium term," it said.

Reading the charts

On the daily chart, Nifty IT index has formed small-bodied candles with long upper shadows, reflecting persistent selling pressure at higher levels. “This pattern suggests that every minor pullback is being met with a fresh short build-up. Derivative data also continues to indicate elevated short positions, implying that the sentiment remains tilted towards caution rather than bargain hunting,” Sudeep Shah, Head- Technical and Derivatives Research at SBI Securities, said.

Considering the current chart structure, price behaviour, and positioning in the derivatives segment, he believes any near-term upside is likely to be temporary and vulnerable to selling unless supported by stronger fundamental triggers such as improved deal flows, stabilization in discretionary spending, or clearer visibility on the revenue impact of generative AI adoption.

Until such catalysts emerge, the bias is expected to remain on the downside or, at best, range bound with a negative tilt, he said.

The index has managed two green sessions after six weeks of losses but whether that marks a turning point or just a pause remains to be seen.