India's IT Sector Faces Investor Concerns Amid Growth Slowdown and AI Disruption

India's top software exporters are facing investor concerns over growth, with Infosys and HCL Technologies reporting results below expectations. This downturn, exacerbated by a weak global economy and AI disruption, has led to a significant drop in the IT sector's valuation, wiping billions off its market cap.

Earnings from India’s bellwether software services exporters have reinforced investor concerns about the sector’s growth prospects, signaling that the downturn in their stocks has further to run.

Infosys Ltd., the second-largest outsourcer, forecast annual sales growth below analysts’ estimates on Thursday, following a profit miss at smaller rival HCL Technologies Ltd. two days earlier. Both stocks declined, with the latter hit by at least half a dozen analyst downgrades. A gauge of the sector plunged more than 5% on Friday to close at its lowest level since June 2023.

The market reaction underscores the two-pronged challenge being faced by India’s $315 billion tech industry — a weak global macroeconomic environment amid the Iran war that has weighed on discretionary tech spending, and the rapid rise of artificial intelligence, which is threatening to disrupt their business models.

The selloff in stocks has deepened since Tata Consultancy Services kicked off earnings on April 9, with nearly $115 billion now wiped off the value of the IT gauge over four months. That has also acted as a key drag on India’s broader market given that tech shares carry a weightage of about 10% in the benchmark NSE Nifty 50 Index.

“We continue to be cautious on the sector,” Surendra Goyal, an analyst at Citigroup Inc., wrote in a note, citing high competitive intensity and continued impact of AI on existing business.

Given the fears of AI-driven disruption, a crucial metric for investors is how effectively India’s IT outsourcers adapt — both in how quickly they embed AI into their own delivery models and how successfully they reposition themselves in the value chain.

Infosys has sought to capitalize on the rapid progress of AI by embedding the technology into its offerings in a bid to curb costs and convince corporations to maintain or enhance their IT budgets. Larger rival TCS has partnered with OpenAI to build AI data centers in India, and now its nearing more such deals with other tech giants.

The companies rose to prominence in the late 1990s by helping Western firms solve the Y2K bug, which had threatened computer chaos at the turn of the millennium. Since then, they have survived fluctuations in global growth from a series of crises, as well as the dawns of new technologies from mobile telecommunications to cloud computing.

For some market watchers, the monthslong selloff has made valuations attractive. The IT gauge is trading at less than 17 times its one-year forward earnings, down from 30 at the start of last year. The benchmark Nifty 50 trades at more than 18 times.

“This is a sector with no price froth, little valuation excess, and a weak business cycle already reflected in prices,” said Sahil Kapoor, a strategist at DSP Mutual Fund. “At current prices, terminal-value risk appears limited, and we remain overweight.”

Still, the decline in share prices following the latest earnings shows investors want to see more concrete results before turning positive. The NSE Nifty IT Index is now down almost 25% in 2026, making it the worst-performing sector gauge in India. It is trailing the Nifty 50 for a second year.

“Discretionary and non-AI technology spending is under pressure, as clients are delaying large, multi-year projects due to economic uncertainty and unclear returns from AI,” said Anurag Rana, senior technology analyst at Bloomberg Intelligence. “Companies lack visibility beyond a single quarter, with CFOs unable to provide clear medium-term guidance amid ongoing uncertainty.”