Foreign institutional investors (FIIs) are sharply reducing exposure to technology sector, amid rising concerns that advances in artificial intelligence could disrupt traditional software services business models that have long powered the country’s IT industry.FIIs pulled out Rs 10,956 crore from Indian IT stocks in the first fortnight of February alone, as the launch of new AI models such as Claude Cowork and tools developed by Palantir intensified fears that highly autonomous systems could reduce dependence on conventional IT services providers.The latest selling adds to sustained outflows from the sector. Foreign investors had already offloaded IT shares worth Rs 74,698 crore through 2025, followed by additional selling of Rs 1,835 crore in January, reflecting growing scepticism about the long-term relevance of legacy outsourcing models.
IT stocks under pressure
The Nifty IT index has declined about 13 per cent so far this calendar year, with several frontline stocks witnessing sharp corrections. Wipro has fallen 19 per cent, LTIMindtree 22 per cent and LTTS 14.5 per cent, while Infosys and other major counters have also registered double-digit losses.The sectoral sell-off contrasts with overall foreign investor behaviour in India. FIIs turned net buyers in equities worth Rs 19,675 crore during the same fortnight following the announcement of an interim US-India trade deal, which also supported the rupee.Capital goods stocks attracted more than Rs 8,000 crore in inflows, while financials saw buying worth Rs 6,175 crore. Oil and gas, metals, power and construction sectors also recorded inflows, ET reported. FMCG and healthcare segments witnessed outflows of over Rs 1,000 crore each, though far smaller than the IT exodus.
AI disruption debate
Analysts remain divided on whether artificial intelligence poses an existential threat to Indian IT services firms.Global brokerage Nomura said fears of rapid displacement may be overstated, arguing that large enterprises are unlikely to replace complex technology ecosystems quickly.“We believe these concerns are oversimplifying the role of IT services companies,” Nomura said, as quoted ET, adding that enterprise buyers prioritise stability and risk reduction over experimentation. “It is easier said than done that a SaaS product and IT vendors can be replaced by vibe-coded apps, given that enterprise IT buyers optimise for career risk — reducing risks of failures — and not costs and innovations necessarily.”Nomura outlined three possible scenarios for the sector. In a pessimistic outcome marked by structural decline, revenue growth could slow to 2–3 per cent or even contract, with valuation multiples falling to 10–12 times earnings as automation erodes routine work.In a middle scenario, companies successfully pivot towards data and AI-led services, allowing growth to recover to high single digits and valuations to stabilise in the early-20 multiples range.The most optimistic case envisions IT firms evolving into AI orchestrators, shifting from billing for effort to delivering outcome-based services. Under such a model, the addressable market could expand from about $1.5 trillion in traditional technology services to nearly $4.5 trillion linked to augmenting or replacing human enterprise labour.“The current sell-off in IT services stocks appears to be a case of front-loading of pains — pricing in extinction of old business models before gains from new business models emerge,” Nomura said, noting valuations have corrected below 12-year averages and now trade at a 12–39 per cent discount to five-year averages.The brokerage identified Infosys and Cognizant among preferred large-cap picks, Coforge among mid-caps and eClerx among small-cap opportunities.Industry players, meanwhile, are positioning themselves to capture emerging AI opportunities. Companies including TCS and Infosys have outlined strategies to expand AI-led consulting, automation and transformation services.Brokerage Emkay Global said IT services firms retain structural advantages despite technological disruption.“IT Services companies have the advantage of contextual understanding of enterprises’ complex environment, domain knowledge, and clients’ trust; hence, they would remain relevant even in the AI era, in our view,” it said.(Disclaimer: Recommendations and views on the stock market, other asset classes or personal finance management tips given by experts are their own. These opinions do not represent the views of The Times of India)
