IT Stocks Plummet Up to 9% as Three-Day Rally Fades

Nifty IT Index Plunges 6% as Profit Booking Hits Indian IT Stocks

The relief rally in Indian information technology (IT) stocks that had been underway for three days came to a sharp halt on Wednesday, 3 June, as investors resorted to profit booking amid the broader market selloff. As a result, the Nifty IT index suffered a near 6% decline, with all 10 index constituents trading significantly lower in the day's trade.

At the forefront of this decline was IT bellwether Tata Consultancy Services (TCS), which crashed almost 9% to ₹2,224.80. Other heavyweights, including Infosys, HCL Technologies, and Tech Mahindra, also took a hit, with declines ranging from 4-6%. LTIMindtree declined by over 8%, while Coforge and Persistent Systems lost 6% each, and Mphasis 4%. Oracle Financial Services Software (OFSS) also lost 4%. This collective decline pulled the Nifty IT pack 5.8% lower to 29,301, making it the worst-performing index on the NSE for the day.

This fall comes after a 7% rise in the IT index over the last three trading sessions. Industry analysts have attributed the recent recovery in IT stocks to Indian IT companies trading near their historical average valuations, and in some cases even below their long-term average price-to-earnings multiples. This has attracted buying interest at lower levels, leading to the recovery seen in IT stocks over the past week.

Read also: SpaceX Seeks Record $75 Billion IPO, Potentially Positioning Elon Musk as the World's First Trillionaire

However, the sector's prospects remain uncertain, with the risk of AI deflation making IT an unpopular choice for investors. At a time when semiconductor, chip, and tech stocks globally are rising, Indian IT firms have faced intense selling pressure. India has emerged as an anti-AI trade, with AI expected to create new opportunities for Indian IT companies but also making software development cheaper and faster, which does not bode well for the labour-intensive Indian IT services sector.

According to brokerages, over the next few years, losses from lower pricing may be bigger than the gains from new AI projects. Kotak Institutional Equities noted in a recent report that a significant portion of the tech spending increase gets consumed by technology price inflation and higher cloud and software consumption that cannot be addressed by Indian IT, which weakens the translation of the spending increase in technology to spending increase with third-party providers.

Industry experts have also warned that the sector's recent move is a "dead cat bounce, not the start of a durable reversal". Harshal Dasani, Business Head at INVasset PMS, said that IT is not correcting because of one AI headline; the deeper issue is valuation discipline. He noted that when a sector is delivering low single-digit growth and still trades at mid-to-high teen earnings multiples, the margin for error is thin. Dasani also highlighted the sector's pressure points, including clients' cautious spending and AI compressing the labour-arbitrage model that Indian IT was built on.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

The sector needs evidence of AI-led revenue replacement, not just AI commentary, according to Dasani. Until that happens, rallies in IT are likely to be sold into. "The risk-reward remains unfavourable," he added.