Nifty IT index has plunged 21% in February so far, and is poised for its worst monthly performance in nearly 23 years. This has also weighed on the performance of the Indian stock market’s benchmark index, as the IT companies command over 10% weightage.

IT stocks witnessed a breather on Wednesday, February 25, in an otherwise tumultuous month for the tech stocks, which have been rocked by the fears of artificial intelligence weighing on the labour-intensive Indian IT software industry.

The Nifty IT index has plunged 21% in February so far, and is poised for its worst monthly performance in nearly 23 years. This has also weighed on the performance of the Indian stock market’s benchmark index, as the IT companies command over 10% weightage.

MFs, LIC lose over ₹1 lakh crore in IT selloff

The impact of this selloff is also visible in the portfolios of mutual funds and Life Insurance Corporation of India, which hold significant stakes in all Nifty IT constituents.

All 10 Nifty IT stocks have lost between 17-27% this month so far. Coforge has emerged as the biggest loser amid a 26.8% fall, while TCS and Infosys have also seen sharp drawdowns. Against this backdrop, mutual funds have faced a significant loss of nearly ₹64,000 crore and LIC a whopping ₹37,000 crore, shows Mint’s data analysis.

Infosys has emerged as the biggest wealth destroyer, as it alone wiped off ₹26,000 from the mutual funds’ portfolios, which hold over 22% stake in the company as of the December quarter. Meanwhile, LIC’s losses came in at ₹13,308 crore.

Another IT heavyweight, TCS, followed suit, as its 16% fall inflicted an over ₹9,000 crore dent to notional wealth for mutual funds and LIC. Other IT bellwethers like Wipro, HCL Technologies and Tech Mahindra also erased significant wealth.

Overall, the Nifty IT companies have lost a cumulative ₹5 lakh crore in wealth amid the AI-triggered meltdown.

Why are IT stocks falling?

Major fears underpinning the $300-billion IT services industry are that AI could compress project timelines, impact deal wins and eat into the profits of the labour-intensive delivery model of IT companies in India.

These fears come on the back of new tools being launched by US firms such as Anthropic and Palantir that are driving AI automation. Additionally, the sector is still heavily dependent on the US and Europe, and lingering doubts about their growth outlook, slower-than-hoped Fed rate cuts and more cautious IT budgets are all showing up in softer deal flow and delayed decisions.

Brokerages warn the Indian IT sector could face further pressure if AI starts to eat into application services revenue, which typically accounts for 40% to 70% of total revenue for these companies, stated a Bloomberg report.

A Motilal Oswal report, dated February 4, had estimated that, assuming a 30-50% productivity hit on low-level work, 9-12% of IT services revenue stands to be eliminated. We expect this to happen over 3-4 years, underscoring a ~2% hit on revenue growth each year, it opined.

However, Emkay Global believes that it is overly simplistic to assume that AI can generate enterprise-grade code and replace IT Services companies. “We expect IT services companies’ role to evolve and business model to shift toward outcome-based compared to predominantly input-based/effort-based today. We believe the market reaction is excessive,” said the brokerage.