India’s IT sector is witnessing an unprecedented rout with stocks tanking on fears of artificial intelligence making the main roles at technology sector giants redundant. It’s a selloff like never before - but is the situation so bad? A new report by JPMorgan says that while AI fears are driving the deep correction, IT firms will survive the storm.
The correction has been severe, with roughly Rs 5.7 lakh crore in market value wiped out within eight trading sessions and the Nifty IT index declining about 19% over a short period. But despite this intense selling pressure, JPMorgan takes a contrarian stance, identifying what it considers compelling value opportunities in large-cap technology stocks such as
Infosys and Tata Consultancy Services (TCS).
Over the eight-day decline, Infosys dropped 21%, TCS fell 19%, HCLTech lost 17%, and both Wipro and Tech Mahindra declined 13%. TCS has now fallen 44% from its peak in August 2024, pushing its market capitalisation below Rs 10 lakh crore and back to levels last seen in 2020.
India’s leading software services companies may currently be facing steep market pessimism, but analysts at JP Morgan have urged investors not to equate the recent selloff with a structural collapse of the sector.
‘Plumbers of the Tech World’
Drawing a practical analogy, the JPMorgan report calls IT firms the ‘plumbers of the technology world’. “While advances such as Claude code’s Cowork plugin can meaningfully accelerate complex task and agentic AI write a lot more software, its simplistic to assume this will be enterprise grade for every function and enjoy the tribal enterprise context IT Services vendors excel at. We definitely foresee partnerships as have been announced with AI tool firms and IT Services firms that can create several new areas of work,” it says.
The brokerage argues that IT services firms continue to play a critical role as the operational backbone of enterprise technology, describing them as the essential “plumbers of the tech world,” even as valuations have fallen to levels last seen during the global financial crisis and the COVID-19 market disruption.
“Indeed, IT services companies remain the plumbers in the tech world, and if enterprise software/SaaS is rewritten on a bespoke basis by agents - it will need significant services plumbing to work in enterprise context and minimise AI slop,” the report says.
According to the report, the analogy reflects the continued need for integration, implementation and operational support even as artificial intelligence tools raise concerns about disruption.
The report further noted that current free cash flow and dividend yields indicate deep value, reaching levels historically associated with periods of extreme market stress such as the global financial crisis and the pandemic. On this basis, the firm recommended a barbell investment approach focused on large-cap value plays, assigning overweight ratings to Infosys and TCS, while also highlighting growth-oriented companies including Persistent Systems and Sagility.
Valuations Reflect Extreme Pessimism
According to reverse discounted cash flow estimates by JPMorgan, current stock prices suggest a very bleak outlook for the sector. At prevailing valuations, TCS, Infosys and HCLTech are effectively being valued on the assumption of roughly 4%, 4% and 5.6% revenue growth, respectively, over the coming decade. These projections fall well below the historical long-term growth range of 7–8% and imply a scenario where growth remains muted with no meaningful acceleration.
The brokerage noted that a decline exceeding 30% from current levels would likely require an extreme outcome in which companies experience zero terminal growth indefinitely. It described such assumptions as overly negative, particularly in light of emerging AI-related revenue streams and the potential for cyclical improvement. Even if the sector’s recent period of low single-digit expansion were to persist permanently, the analysis indicates that downside risk would be limited to around 10%, a scenario that does not appear to justify the scale of recent selling pressure.
Why AI May Not Eliminate Demand
The core argument presented rests on a seemingly paradoxical idea: the rising use of artificial intelligence may actually increase the need for IT services rather than diminish it.
While tools such as advanced coding assistants can accelerate development and enable AI systems to generate more software, it is unrealistic to assume that these outputs will consistently meet enterprise-grade standards across all use cases or replicate the contextual expertise that IT services providers bring to complex organisational environments.
The report suggests that AI could open up entirely new categories of work. These may include modernising decades-old legacy systems that were previously too costly to overhaul, building customised AI-driven versions of SaaS platforms if replacements become necessary, deploying AI agents for operational functions, strengthening AI governance and reliability frameworks, and integrating AI into physical systems.
“ We expect net new areas of work including addressing multi-decadal tech debt but modernising legacy code (previously too expensive), rewriting custom agentic versions of SaaS (if SaaS has to be replaced), AI agents for Ops, AI trust and reliability services, physical AI integration to name a few. We have also argued that enterprise tech teams have been classically under-funded, with several more demands from business than IT can deliver. Thus, AI will be another tool to address more work with the same budget like offshore labor, enterprise software, cloud have been in the past. This will still need services firms,” says JPMorgan in its report.
With the sector now trading at multiples typically associated with periods of severe market stress, JP Morgan believes downside risks may be limited even under conservative assumptions. Its scenario-based assessment indicates that while bearish outcomes remain possible, the extent of further decline appears contained, whereas even a modest improvement in growth could result in meaningful upside from current levels.
The brokerage concedes that, in the near term, it is difficult to precisely measure or counter concerns around AI-driven disruption.
(Disclaimer: Recommendations and views on the stock market, other asset classes or personal finance management tips given by experts are their own. These opinions do not represent the views of The Times of India)