Indian IT stocks have remained under intense selling pressure over the past year amid global macroeconomic headwinds, muted earnings growth, and mounting concerns over the disruptive impact of Artificial Intelligence (AI) on traditional outsourcing models.
Most frontline IT stocks have delivered negative returns over the past year and since the start of 2026. The Nifty IT index has declined more than 23% year-to-date (YTD), significantly underperforming the benchmark Nifty 50, which has fallen 9% during the same period.
Among Nifty IT constituents, LTIMindtree emerged as the biggest laggard, plunging over 33% YTD and nearly 20% over the past year. On a YTD basis, shares of HCL Technologies have fallen 28%, Tata Consultancy Services (TCS) declined 27%, Infosys dropped 26%, and Wipro slipped 23%.
Meanwhile, Persistent Systems, L&T Technology Services (LTTS) and Mphasis shares lost more than 20% each, Coforge dropped 17%, while Tech Mahindra has declined 10% so far this year.
Why are IT stocks falling?
A combination of structural and cyclical factors has triggered the sharp selloff in IT stocks.
AI disruption concerns
Fears surrounding AI-led disruption continue to weigh heavily on the sector. Generative AI tools and automation are expected to reduce demand for traditional outsourcing, application development, and maintenance services — key revenue drivers for Indian IT firms.
India’s IT services sector has also lagged in the broader AI ecosystem, while the global shift toward AI-driven investments has redirected capital flows away from traditional IT service providers.
At the same time, global enterprises are tightening discretionary spending and increasingly migrating workloads to cloud-native and AI-first vendors, reducing the market share of legacy outsourcing companies.
“AI is increasingly deflationary, with productivity gains being passed on to clients, compressing growth in the existing book. This quarter, more companies began acknowledging that GenAI-led deflation is translating into commercial pressure,” brokerage firm Motilal Oswal Financial Services said in a note.
HCL Technologies highlighted a 2–3% deflationary impact from GenAI on its existing business, while Infosys’ FY27 guidance suggests such pressures are likely to persist as productivity gains are increasingly shared with clients.
Valuation de-rating after strong outperformance
IT stocks have also faced valuation compression after a strong rally in 2023 and 2024, during which the Nifty IT index significantly outperformed the broader market and pushed valuations above historical averages.
As concerns around AI disruption intensified and earnings visibility weakened in early 2026, the sector witnessed an aggressive de-rating.
Global macro headwinds
External factors have further exacerbated the weakness in IT stocks. Higher-for-longer US interest rates, tariff-related uncertainty, and rising geopolitical tensions have prompted global investors to shift toward safer assets, resulting in sustained foreign institutional investor (FII) outflows from Indian equities, including the IT sector.
How did IT companies perform in Q4?
The Q4FY26 earnings season did little to alleviate concerns surrounding structural demand and AI-led disruption.
According to Motilal Oswal, nearly 40% of IT companies missed revenue estimates, while 66% met or exceeded margin expectations. However, key questions around long-term demand drivers remained unresolved.
Margins largely met or surpassed estimates in the March quarter, supported by favourable currency movements, pyramid rationalisation, lower SG&A costs, and productivity improvements. Rupee depreciation against the US dollar also provided a meaningful translation benefit.
However, the brokerage expects fresh margin pressures in FY27 as wage hikes, higher AI-related investments, and large-deal ramp-ups begin to weigh on profitability. Additionally, pricing pressure in a weak demand environment and continued deflationary trends may further constrain margins.
Analysts believe the GenAI adoption curve is likely to remain margin-dilutive in the near term, as companies continue to invest heavily while monetisation remains at an early stage.
Motilal Oswal expects industry-wide margins to remain broadly flat over the next 18–24 months, adding that any meaningful margin expansion is likely to be driven by workforce productivity gains rather than revenue growth.
Are IT stock valuations attractive?
Following the sharp correction, analysts believe IT stock valuations have turned attractive. However, the absence of clarity around AI-led disruption and future earnings growth could cap near-term upside.
“Valuations of IT stocks are attractive now. But there is no clarity on the impact of AI on IT companies’ future earnings. Therefore, investors, particularly large institutional players, are refraining from investing in IT stocks,” said Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Investments.
“IT stocks are no longer the darlings of the market, they once used to be,” he added.
Motilal Oswal also noted that IT valuations have become inexpensive, with Tier-I IT companies trading nearly 20% and 31% below their 10-year and 5-year average valuations, respectively.
TCS and Infosys are currently trading around minus one standard deviation (-1 SD) price-to-earnings (P/E) levels and roughly 40% and 26% below their 10-year valuation averages. Meanwhile, HCL Technologies and Tech Mahindra are trading closer to their long-term averages.
“Until deflationary pressures ease and new AI-led implementation use cases emerge, returns are likely to remain capped,” Motilal Oswal said.
Kunal Bajaj, Research Analyst at Choice Institutional Equities, noted that most major technology transitions have historically triggered corrections of 30–35% in IT stocks, making valuations significantly more reasonable today compared to 12–18 months ago.
“However, this AI transition is fundamentally different from prior cycles because it directly challenges the traditional labour-arbitrage model that Indian IT has relied on for decades. In the near term, AI is creating a deflationary impact on revenues, as productivity gains reduce billing in legacy services,” said Bajaj.
According to him, the sector is likely to bottom out only when AI-led implementation, transformation, and platform revenues begin to meaningfully offset the erosion in traditional revenue streams — a transition he expects to be gradual rather than immediate.
He added that management commentary for FY27 has largely remained unconvincing, suggesting limited near-term visibility.
“A durable re-rating will happen when IT companies demonstrate that AI-led services growth is outpacing the decline in traditional offerings. Until that evidence emerges, any strong positive movement in stock price could be temporary,” Bajaj said.
IT Stock Picks
On stock selection, Bajaj believes the long-term winners within the sector will be the companies that move from an employee-led model to an IP-led, platform-based and outcome-oriented model built around client-specific solutions.
He further highlighted that Tier-2 IT firms have historically gained market share during tech transitions due to their agility. With valuation premiums cooling to around 20% versus historical peaks of 45–50%, Bajaj sees better relative risk-reward in companies such as Coforge, Persistent Systems and Happiest Minds Technologies.
Motilal Oswal continues to favour selective, bottom-up opportunities with stronger deal visibility and earnings resilience.
Among large-caps, it prefers Tech Mahindra, while in the mid-tier segment it favours Coforge and KPIT Technologies. It also remains constructive on HCL Technologies despite near-term growth concerns, citing its positioning for the next phase of growth.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
