IT stocks tumble on OpenAI's push into AI adoption

Mumbai: Information Technology stocks cracked on Tuesday with the Nifty IT index tumbling 3.7% at 28,234.9 to its lowest closing level in three years after OpenAI's fresh investments to enhance AI adoption by companies soured investor sentiment in an already weak market.

"Open AI's investment in the new company signals that AI-led companies will also embed the products in other companies, which threatens Indian IT companies, which were banking on the implementation of AI services," said Dharmesh Kant, head of research, Cholamandalam Securities.

OpenAI said on Monday it is setting up a company with more than $4 billion in early investment to help entities build and deploy artificial intelligence systems, ramping up pressure on traditional software services business models.


Nifty IT index's drop on Tuesday is the highest single-day fall since April 24. Benchmark Nifty fell 1.8%.

All ten index constituents declined on Tuesday. LTM slumped 4.8%. Tech Mahindra and Persistent Systems dropped close to 4.5%. Tata Consultancy Services, HCL Technologies and Coforge declined around 4% each.

The outlook for IT stocks remains dicey as it grapples with existing concerns and newer headwinds on account of increased AI adoption, which could jeopardise their earnings trajectory further, said Gaurav Sharma, head of research, Globe Capital.

"The midcap IT names that derive most of their revenue from BFSI like Coforge and Mphasis, are the preferred picks in the sector," said Sharma. "These names could offer some opportunities in the next couple of years once the dust settles."

So far this year, Nifty IT has plunged 25.5% while the benchmark Nifty declined10.5%.

After the fall, the Nifty IT index is trading below key short-term and long-term averages, highlighting the risk-off mood in these stocks.

The 200-day SMA is considered the "line in the sand" for long-term trends, and trading below it confirms a bearish phase, said Mayank Jain, Market Analyst, Share.Market (PhonePe Wealth).

“Until the index sustains a move back above the 50-day SMA (simple moving average), any price recovery will likely face selling pressure,” said Jain. “Currently, the Nifty IT index is struggling to hold the 28,200–28,500 support zone.”

The 28,500–30,000 range is a ‘no-trade zone’ characterised by high volatility, and attempting to buy here is akin to ‘catching a falling knife’ until a clear reversal pattern forms, said Jain.