IT Stocks Fall to Pre-Covid Lows: Warning Sign or Rare Opportunity?

India's IT services sector has entered a "value zone" after a sharp correction in stock prices. The Nifty IT index on Tuesday's morning trade slid over 2% to near a three-year low, reflecting deepening investor concerns over growth and AI-led disruption.

All major IT stocks came under pressure during the morning session, with Wipro falling over 3%, Infosys declining around 2.2%, and TCS, HCL Technologies, and Tech Mahindra also posting losses, placing the entire pack among the top losers on the benchmark index.

At 9:33 AM, the Sensex slipped 93 points, or 0.1%, to 75,410, while the Nifty declined 32 points to 23,377. Market breadth remained positive, with 1,632 stocks advancing versus 1,363 declining.

The sell-off extended beyond large caps, with mid-cap IT firms like Coforge dropping sharply, indicating broad-based weakness across the sector.

However, the indices recovered during the intraday session, with Sensex trading 645.02 points higher at 76,147.87 at 3:10 PM. The Nifty was changing hands at 23,594.50, gaining by 185.70 points.

Entering The 'Value Zone'

According to a recent sector update by ICICI Securities, valuations of IT companies have fallen to levels last seen during pre-Covid low-growth periods. The correction is taking placing after the launch of the Claude Cowork Agentic AI plugins in January.

The development reflects rising concerns that AI could structurally reshape the industry by lowering pricing power and shifting technology spending away from traditional services.

ICICI Securities, however, said that the launch of advanced AI agents is unlikely to upend IT delivery models overnight, but the advancement in AI agents inflates the risk of AI-led revenue deflation. The correction in valuations captures the structural AI headwinds leading to prolonged subdued growth for the industry.

Despite the near-term challenges, the brokerage upgraded its stance on the sector to "Neutral", citing limited downside risks as much of the pessimism is already priced in.

AI Impact: Double-Edged Sword

AI is emerging as both an opportunity and a threat for IT services firms. On one hand, companies are witnessing significant productivity gains across functions such as software development and business process outsourcing. On the other, these efficiencies are leading to "AI-led deflation", where clients demand lower prices for services.

"The fear with AI is that there's more competition, more pricing pressure, and that their competitive moats have gotten shallower, meaning they could be easier to replace with AI," Thomas Shipp, head of equity research at LPL Financial told Bloomberg in February.

While firms are attempting to offset pricing pressure by increasing volumes and shifting to fixed-price contracts, the revenue growth is expected to remain subdued over the next two years.

Growth to Stay Below Historical Levels

The brokerage firm projects India’s IT services revenue growth to be modest with 3-6% year-on-year in FY27, an improvement from around 2.2% in FY26, but still well below the 7-8% historical average.

The near-term outlook is being shaped by a combination of structural and cyclical factors, with AI emerging as a central force.

AI-Led Deflation Pressures Pricing

One of the biggest shifts underway is AI-led deflation. While AI is driving significant productivity gains, ranging from 15-30% in software development to as much as 50-60% in maintenance and support, it is also putting pressure on pricing, as clients demand cost savings, according to ICICI Securities.

At the same time, global technology spending is being redirected, with the share of IT services in overall tech budgets expected to decline by around 8% between CY23 and CY26, as enterprises prioritise investments in AI platforms and infrastructure.

Demand from technology clients remains another weak spot. Software companies, grappling with slower growth, estimated to be 0-2.5 percentage points lower year-on-year, are tightening discretionary spending and cutting back on outsourced IT services to fund their own AI investments. This is further compounded by a growing shift toward insourcing, with companies increasingly setting up Global Capability Centres (GCCs). Around 120 new GCCs were added in 2024-25 alone, with leasing activity rising nearly 20% year-on-year, signalling a steady move away from traditional outsourcing models.

Reflecting this cautious environment, hiring trends across IT firms remain muted, with companies relying more on productivity gains than workforce expansion, an indication of subdued demand expectations in the near term.

Global Tech Layoffs Signal Structural Shift

It is to be noted that recently major tech giants from around the world have announced laying off employees due to increased reliance on AI. Atlassian, the Australian-American software company behind tools like Jira and Confluence, announced reducing 1,600 employees to redirect resources toward artificial intelligence and enterprise sales, according to a report by Reuters.

Oracle, the American software giant, is preparing to lay off as many as 45,000 employees across multiple divisions, a figure that exceeds its previously confirmed range of 20,000 to 30,000 cuts, according to Bloomberg.

The reductions could begin as early as this month. The reason for the job cuts is Oracle spending enormous sums to build AI infrastructure and facing a cash crunch as a result. In other words, the same technology Oracle is spending billions to build is also being used to justify cutting the people who helped build it.

More recently, Block, the payments and technology company founded by Twitter Co-founder Jack Dorsey, announced it would cut 4,000 of its 10,000 employees.

The trend is not new. Through 2025, some of the biggest names in technology made sweeping cuts they directly attributed to AI-driven changes. Microsoft cut around 15,000 jobs, while Amazon and Salesforce both linked their reductions to AI-led shifts in how they operate.

Geopolitical Risks Weigh on Demand

Adding to these pressures is geopolitical uncertainty, which continues to cloud the global macro environment. The ongoing West Asia conflict is raising the risk of second-order impacts on enterprise technology spending, as companies turn more cautious on discretionary investments. This could further delay decision-making cycles and weigh on demand recovery for IT services firms, ICICI Securities added.

Mid-Caps Seen Better Placed

Against this backdrop, the brokerage firm prefers mid-cap IT companies over large-cap peers, citing their agility in adapting to AI-led changes. Firms such as Coforge, Mphasis, Hexaware, and LatentView are seen as better positioned to capitalise on emerging opportunities.

The firm upgraded Coforge and Mphasis to "Buy" from "Hold" and "Add", respectively, basis their attractive valuations and healthy revenue growth visibility showing in the resilient revenue growth momentum, deal bookings and management’s commentary on deal pipeline.