Aniket PujariThis coincides with OpenAI’s launch in November 2022, which marked an inflection point in the country’s $283 billion sector as it upended the way businesses were run. The rise of automation further aggravated the issues of the sector which is facing tightening labour mobility in the US, its largest market.
A brokerage pointed to a similar trend on another index.
“We note that IT services’ share in Nifty profits has been stable at 15% for the past four years, whereas its weight in the benchmark index is now at a decadal low of 10% (vs. 19% peak in Dec’21),” said Motilal Oswal Financial Services analysts Abhishek Pathak, Keval Bhagat, and Tushar Dhonde, in a note dated 24 November.
For now, at least a few brokerages believe that this could be the right time for investors to invest in IT.
“We believe we are at the bottom and the risks skew to the upside. Our analysis suggests outsized gains if this plays out, whereas the current levels already bake in the status quo (GenAI-led deflation, demand apathy),” said the Motilal Oswal analysts, expecting growth recovery from September 2026 “as enterprises enter full-scale AI deployment”.
At the moment, industry no. 2 Infosys holds the biggest chunk of the pie among the country’s big five with a weightage of 5.49% on the Sensex. TCS, HCLTech, and Tech Mahindra follow with a 3.17%, 1.69%, and 0.95% share, respectively. Indian IT services companies were at their heaviest in 2021, when they made up about 18.56% of the BSE benchmark index in 2021.
The BSE Sensex index is a basket containing shares of the country’s 30 most financially sound and well-established companies. It is widely considered a barometer of the stock market and the broader economy. Banks and financial service providers form the largest constituents of the BSE 30, making up about a third of the index.
Lower weightage in the Sensex implies that the company’s value in the overall index has declined, with its low share prices being a key contributor. The weightage of any company in the Sensex is determined by dividing the market capitalization of the company by the market cap of the overall index. Market capitalization is a product of the company’s shares traded in the market and share price.
Automation overhang
At least one analyst attributed this decline in weightage to the rise of automation tools.
“Automation, geopolitical uncertainties, weak discretionary spending and fewer number of big ticket deals have impacted growth for the IT players and this led to decline in weightage,” said Amit Chandra, vice-president of HDFC Securities.
Non-essential or discretionary spending by clients is a key growth driver for IT services companies because it adds on their incremental revenue.
While automation was a key factor, a third analyst attributed the declining weightage to a tech transition that homegrown IT outsourcers could not adapt to.
“It (low weightage) means the market is recalibrating expectations during a major technology transition. Automation and new delivery models are disrupting the traditional services engine. Investors want to see how fast these (IT Services) firms can convert automation into new revenue streams rather than pure cost take out. The lower weight reflects the belief that the next phase of value creation in IT services will look very different from the last twenty years,” said Phil Fersht, chief executive of HFS Research.
For now, AI is eating into the revenue of the country’s largest IT firms. Automation tools are replacing manual labour and this is hurting IT outsourcers as fewer people are getting billed. AI’s deflationary impact and weak deal win activity contributed to the big five growing at their slowest pace in over a decade, last fiscal.
TCS, Infosys, and HCLTech ended with $30.18 billion, $19.28 billion, and $13.84 billion in revenue, up 3.78%, 3.85%, and 4.3% on a yearly basis, respectively. On the other hand, Wipro and Tech Mahindra ended with $10.51 billion and $6.26 billion, down 2.72% and 0.21%, respectively.
A fourth analyst voiced a similar opinion, adding that homegrown IT outsourcers were slow in scaling AI solutions for clients.
“Indian service providers have to adapt to the long-term trend of decoupling service delivery from labor arbitrage. While automation and productivity will always be part of that secular shift, the scaling of Agentic AI is much slower than many commentators suggest,” said Thomas Reuner, principal analyst at Pierre Audoin Consultants, a European consulting and analyst firm. Agentic artificial intelligence refers to AI software capable of decisions with no or minimal human intervention.
This comes as the country’s $283 billion IT sector is already facing uncertain demand from clients including JP Morgan Chase and Co., Microsoft Corp., and Citibank.
Investors seem to have taken note.
Not only did the weightage of the IT stocks in the 30-share BSE Sensex reduce, but fourth-largest Wipro was also delisted from the Sensex in June last year on account of weaker market capitalization.
Much of this was on account of a plunge in share prices of the biggest tech service providers. Shares of TCS, Infosys, HCLTech, Wipro, and Tech Mahindra fell 23.47%, 17%, 14.74%, 17.14%, and 9.97% since the start of the year, respectively. BSE Sensex gained 8.64% in this time.
P/E downtrend
Even their price-earnings (P/E) ratio, which indicates growth outlook, is at multi-year lows with four of the five largest IT services companies trading at a discount to their average P/E ratio of the last five years.
A weak P/E ratio, calculated by dividing the share price by its earnings per share, indicates a weak growth outlook and lower valuations for its shares listed on the market.
However, analysts expect the situation to improve as AI adoption picks up.
HDFC’s Chandra added that investors will invest in IT shares as a new tech cycle has started.
“There was capital expenditure on data centers and AI infrastructure in the US. Now, companies need applications to run these centers and this is where system integrators will be needed. Their growth will start to play out next year onwards,” said Chandra.
A fifth analyst expects a rally in IT shares because of lending rate cuts in the US, which is Indian IT’s largest market.
“The US Fed is more inclined to cut rates and these have typically favoured a rally in IT shares as enterprises are expected to loosen purse strings for more IT upgradation,” said Pramod Gubbi, one of the founders of Marcellus Investment Managers.
A lower rate of interest allows companies to borrow more money from financial institutions to fund their tech projects including AI embedding.
