Foreign institutional investors (FIIs) are fleeing India’s technology sector at an alarming pace, unconvinced that software services giants can survive the AI disruption threatening to hollow out their business models. FIIs pulled out Rs 10,956 crore from Indian IT stocks in just the first fortnight of February, as the release of new models from Claude and Palantir deepened fears that highly autonomous tools could disintermediate the very companies India’s stock market has long treated as crown jewels.

FIIs had already dumped Rs 74,698 crore worth of IT stocks through 2025, followed by another Rs 1,835 crore in selling last month, as investors are questioning the relevance of the business models of Indian IT services companies. Highly autonomous tools such as Claude Cowork and similar ones from Palantir threaten to disintermediate IT services companies, as a reduction in effort and compression in value could herald a wave of sharp revenue erosion.

The Nifty IT index has cratered roughly 13% in the calendar year. Wipro is down 19%, LTIMindtree 22%, LTTS 14.5%, with Infosys and LTIMindtree also bleeding double digits.

The IT rout stands in sharp contrast to broader FII behaviour this month. Foreign investors have actually turned net buyers in India overall to the tune of Rs 19,675 crore last fortnight after the announcement of an interim US-India trade deal that also eased pressure on the rupee. Capital goods stocks attracted over Rs 8,000 crore in foreign buying, financials Rs 6,175 crore, with oil and gas, metals, power, and construction also seeing inflows. FMCG and healthcare each saw outflows of over Rs 1,000 crore, but nothing close to the scale of the IT exodus.

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“We believe these concerns are oversimplifying the role of IT services companies,” global brokerage firm Nomura said, arguing that enterprises do not simply rip out complex technology stacks for unproven alternatives. “It is easier said than done that a SaaS product and IT vendors can be replaced by vibe-coded apps, given that enterprise IT buyers optimise for career risk — reducing risks of failures — and not costs and innovations necessarily.”

Nomura lays out three scenarios for where this ends. In the worst case of structural decline, revenue growth hovers between +2-3% or actually contracts, with price-to-earnings multiples collapsing to 10-12x as routine work gets automated and IT companies fail to replace lost business.In a middle scenario, companies pivot toward data and AI-led services, growth returns to high single digits, and multiples stabilise in the early 20s. In the most optimistic scenario, IT companies transform into AI orchestrators, shifting from selling effort to selling outcomes, with Cognizant recently flagging that the addressable market in this model expands from a $1.5 trillion pure tech services opportunity to a $4.5 trillion one of augmenting or replacing human enterprise labour.

“The current sell-off in IT services stocks appears to be a case of front-loading of pains — pricing in extinction of old business models before gains from new business models emerge,” Nomura said. The brokerage notes valuations have corrected to below 12-year averages and at a 12-39% discount to five-year averages, with dividend yields of 4-5% likely to create a floor. Its preferred picks are Infosys and Cognizant among large caps, Coforge among mid caps, and eClerx among small caps.

On their part, giants like TCS and Infosys have announced roadmaps to capture part of the multi-billion-dollar AI services opportunity.

“IT Services companies have the advantage of contextual understanding of enterprises’ complex environment, domain knowledge, and clients’ trust; hence, they would remain relevant even in the AI era, in our view,” Emkay Global said.

(Ritesh Presswala)