Beyond the Nasdaq: How AI reset will impact domestic IT stocks
A US tech sell-off sparks worries for Indian IT over AI disruption and spending. Experts see a neutral impact, noting future growth hinges on tech spending, workforce adaptation, and earnings.
The sharp sell-off in US technology stocks has once again raised questions about the outlook for Indian IT companies, which have been under pressure amid concerns over AI-led disruption, slowing growth and uncertain technology spending. But will a correction in US AI stocks trigger a shift towards traditional IT services companies, or could it create a fresh set of challenges for the sector? US markets witnessed a broad-based sell-off towards the end of the week as investors dumped technology stocks amid growing concerns over the returns on massive artificial intelligence (AI) investments.
The Nasdaq Composite plunged 2.86 percent to 25,437, while the S&P 500 fell 1.82 percent to 7,580. The Dow Jones Industrial Average declined 573 points, or 1.09 percent, to 51,775. The selling intensified after Amazon disappointed on revenue expectations, while Intel plunged 29 percent following its earnings report and warnings over gross margins. Brent crude also surged to $113 per barrel, adding to concerns over inflation and the broader macroeconomic outlook.
For Indian IT companies, the immediate concern is whether the correction in US technology stocks will affect technology spending by their largest clients. There is also a view that investors could move away from expensive AI stocks and towards traditional IT services companies. However, market experts are not entirely convinced that such a rotation is underway. Kranthi Bathini of WealthMills Securities believes the impact of any further moderation in US AI stocks on Indian IT companies is likely to be neutral.
"What I am more interested in is how US companies are going to increase their IT spending. That could have a positive impact on Indian IT companies," he said. According to Bathini, the opportunity for Indian IT companies lies in the continued increase in AI spending by US corporations. While AI can help companies reduce costs and improve productivity, its adoption also comes with recurring expenses, which could create business opportunities for IT service providers.
However, Indian companies will also have to prepare for the shift by upskilling their workforce and adapting their business models. Bathini said the contribution of AI to the business of Indian IT companies has increased over the past few quarters. On valuations, he believes large-cap IT stocks look attractive despite their recent recovery. "Infosys at around Rs 1,000 and TCS at around Rs 2,000 look 'mouthwatering'," he said.
However, uncertainty over future growth remains a key overhang. He also sees opportunities in mid- and small-cap IT companies, given their specialised business models and exposure to specific domains. Sumit Pokharna, vice-president, information technology, at Kotak Securities, however, is not convinced that Indian IT stocks will automatically benefit from an anti-AI trade. For this to happen, foreign institutional investors (FIIs) would have to sell US technology stocks and redirect that money into Indian markets.
"But that data is not supporting," he said. Pokharna said investors would have to wait for more evidence of such a shift rather than assume that a sell-off in US AI stocks would benefit traditional IT services companies. He also advised investors to be selective in the sector. While valuations have improved considerably, he cautioned against comparing them with historical averages without factoring in earnings growth, which remains less impressive at present.
Among large-cap IT stocks, Kotak Securities prefers Tech Mahindra, while Coforge and Persistent Systems are its preferred picks in the mid-cap segment. Pokharna said Tech Mahindra's management-led turnaround initiatives and decent quarterly performance have strengthened his conviction in the company. The correction in US AI stocks, therefore, does not necessarily make Indian IT companies an automatic beneficiary.
Much will depend on whether global technology spending holds up, how Indian IT companies adapt to AI and whether earnings growth improves enough to support valuations.
