IT nightmare on loop, Accenture's 20% fall highlights AI disruption

Mumbai: Indian technology stocks slumped Friday, with the gauge representing the bellwethers losing more than 6% during the day and closed 3.7% lower, after the world's biggest outsourcing company by market value, Accenture, slumped 20% on revenue forecasts and order bookings that trailed Wall Street expectations.

Battered by AI-spawned disruptions, Accenture has now lost nearly 50% in a year, putting a question mark on the sustainable competitive advantage of the Indian-listed pureplay that had hitherto relied largely on outsourcing-led cost arbitrage to build a $280-billion industry over the past three decades. For Accenture, which often provides the cue for India's outsourcing industry, its initial 20% loss Thursday was the worst in its trading history.

The Nifty IT index slumped as much as 6.4% during the day and closed at 27,426.85-the lowest level since May 14. The Nifty declined 0.6%. Infosys slumped 6.5% while Tata Consultancy Services (TCS) lost 3.1%.

Accenture's guidance and circumspect commentary triggered the sell-off for the second straight day. Battered valuations limit downside in these stocks, analysts believe, but lack of clarity on growth in a world powered by AI offers restricted scope for upside, too.

"Most of the negatives are priced in and the valuations are now at a discount to Nifty valuations," said Sunny Agrawal, analyst at SBI Securities. "So, stocks are expected to stabilise but the growth outlook remains hazy."

Large-cap IT companies guided for tepid growth of 2-5% while midcaps like Coforge, Persistent Systems expect low double-digit growth, he said.

All constituents of the IT index declined except Oracle Financial Services Software that bucked the weak trend and gained 2.9%. LTM dropped 4%, while Mphasis slipped 2.9% lower. Tech Mahindra, HCL Technologies, and Persistent Systems fell over 2% each.

Accenture's guidance suggests the likelihood of further pain in the next couple of quarters as revenue revival has taken a backseat, said Ajit Mishra, SVP Research at Religare Broking.

"The Nifty IT Index is on the verge of retesting the 2023 lows of 26,300 from where it had rebounded to a record high of around 46,000 levels," he said. "If it fails to hold these levels then it can slide lower to 24,200-24,300 levels."

Mishra said that the Infosys breached a major trendline on the monthly chart and a breakdown below ₹1,040 could confirm further breakdown.

So far this year, the Nifty IT index plunged 27.6% while benchmark Nifty fell 8.1%.

"IT has lost investor favour due to likely AI led deflationary impact and uncertainty on growth from AI led offerings for clients," said Agrawal. "Investors should wait for the Q1 commentary to deploy funds in IT sector."

"That said, there are better opportunities available in the equities across sectors like banking, auto ancillary, hotels, defence," he added.

Mishra said that investors should stick to the winners from the pack rather than adding stocks simply because valuations are attractive.

"Investors should avoid fresh positions in IT stocks for the short-to-medium term and refrain from adding to existing bets for now," he said. "HCL Technologies, Oracle and Coforge are relatively better placed over a one-to-two-year timeframe."