AI impact: FPIs sell Rs 10,956 crore worth of IT stocks in 15 days; holdings drop 16%

Foreign portfolio investors (FPIs) dumped domestic information technology (IT) stocks worth Rs 10,965 crore in the first 15 days of February amid fears that AI could generate enterprise-grade code and replace IT services, fortnightly data from NSDL suggested. Their holdings, or assets under custody (AUC), in the IT sector fell 15.92 per cent to Rs 4,48,938 crore as of February 15 from Rs 5,33,953 crore as of January 31. This is even as the institutional category bought Rs 19,675 crore worth domestic shares during the same period.  

Data showed Infosys Ltd shares are down 15.43 per cent in February so far. Tata Consultancy Services (TCS) has fallen 13.3 per cent during the same period. Wipro, HCL Tech and Tech Mahindra have declined 10-14 per cent over the same period.

Emkay Global said it is difficult to quantify the real impact of AI on IT Services business, as the timing of potential headwinds from AI-led productivity gains and tailwinds from modernisation and new AI-led spending remain uncertain at this stage of the cycle. But the domestic brokerage said it is overly simplistic to assume that AI can generate enterprise-grade code and replace IT Services companies. 

“We expect IT services companies’ role to evolve and business model to shift toward outcome-based compared to predominantly input-based/effort-based today,” it said calling the recent market reaction as excessive, aligning well with Amara’s law where investors tend to overestimate the effects of a technology in the short run and underestimate them in the long run.

Tata Mutual Fund in a note said investors are pricing in the decline of old business models before the  benefits of new ones show up. The actual impact of disruption to IT companies is gradual , which will take time to build additional revenue sources coming out of AI transition, it said.

“While the transition is painful, strong free cash flow and  healthy dividend yields should help support stock prices. But, currently the market was  expecting growth recovery in 2026 (after 2 years of slow growth) and that might get delayed  or slower. Good news is valuations have corrected to factor in that,” it said.

Emkay Global said Enterprise systems are complex and adoption is expected to remain gradual. 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, it said.

“Post correction, large-cap IT services companies are trading at FCF yield of 5-6 per cent, and valuations imply 5-6 per cent terminal growth. We believe the correction largely reflects fear of the unknown. With the impacts hard to quantify, investors have trimmed terminal growth assumptions,” it said.