Nifty IT reverses 2-month buying streak as faster AI rollout renews deflation concerns

Fresh updates from the financial markets indicate that Nifty IT index has fallen for the seventh straight session and is down more than 7 percent so far this month. Heavyweights including TCS, HCL Tech, Wipro and Tech Mahindra have declined between 5-10 percent during the period. The softness comes after two consecutive months of buying in the sector.

The latest launches from Anthropic, OpenAI, Google and Meta are proving to be a double-edged sword for the sector. While better and cheaper AI models could accelerate enterprise adoption and create new topline opportunities for IT firms, market watchers fear that they additionally raise the risk of deflation in legacy services as more software and business processes become automated.

AI models are getting cheaper and closer in capability

Kotak Institutional Equities stated the latest releases point to three important trends: software capabilities are improving, the gap between leading models is narrowing and vendors are increasingly focused on cost efficiency and cheaper pricing.

For Indian IT firms, this creates a mixed picture.

“Softer capability improvement in software-related tasks compared to certain other domains is a positive outcome for Indian IT,” Kotak stated, arguing that it leaves room for more AI adoption by enterprises and creates new use cases for IT services firms.

At the same time, the brokerage stated the deflation risk has not gone away. Even incremental improvements in coding and reasoning can add up as newer models are released.

Cheaper AI is a double-edged sword

The sharp decline in AI costs is another key factor for Indian IT.

Google and Meta are offering significantly cheaper alternatives, while Anthropic and OpenAI have additionally been working on improving price-to-performance. Kotak stated softer costs should accelerate AI adoption, but this can work both ways for IT firms.

On one hand, greater AI usage can create new business opportunities for Indian IT firms. On the other, AI can automate parts of existing services, putting pressure on pricing and employee-intensive work.

Kotak as a result sees elevated risks but additionally elevated opportunities for Indian IT. It stated firms will need to stay flexible and work with multiple AI model providers as the gap between models narrows.

The brokerage additionally flagged engineering and design services as an area to watch, given the improving capabilities of AI models.

AI topline still too small to offset legacy pressure

UBS additionally sees both opportunities and risks, but stated it is still too early to establish whether AI-related topline can offset the pressure on traditional IT services.

AI revenues at present stay a small part of overall sector topline, meaning market participants cannot yet conclude that new AI-led expansion will fully compensate for potential deflation in legacy services.

UBS stays selective and prefers Tier-2 IT firms over larger Tier-1 peers. It upgraded Tech Mahindra to Buy and boosted its target price to Rs 1,865 from Rs 1,460, while downgrading HCLTech to Neutral from Buy. It additionally trimmed Persistent Systems to Neutral, citing valuation.

CLSA has taken a more wary stance on large IT firms, downgrading TCS, Infosys and Tech Mahindra to Hold and Wipro and Mphasis to Underperform. It prefers mid-tier names such as Coforge and Persistent Systems.

CLSA stated large IT firms face AI-led deflation in legacy managed services alongside macroeconomic headwinds, although elevated AI volumes could eventually offset some of that pressure by FY30.

With valuations and expectations now being reassessed, the debate for Indian IT is increasingly shifting from whether AI is a threat to how quickly firms can turn AI adoption into new topline before automation starts eating into existing businesses.