Indian IT: 27% Drop and a Bet on the AI Integration Trade

The Nifty IT index has fallen 27% year to date. The sector's weight in the Nifty 50 has dropped to 7.6% from 12-14% in 2023. Foreign portfolio investors net sold ₹26,801 crore in IT stocks through May 31. The index touched a three-year low in June.

Several fund managers see that decline as a contrarian entry point. Sailesh Raj Bhan, chief investment officer of equities at Nippon India Mutual Fund, said stock prices have already absorbed much of the bad news. Even if growth stays muted, leading IT companies offer earnings yields of 6-7%, he said. A weaker rupee helps: the currency depreciation boosts the rupee value of dollar-denominated revenue.

What the Bulls See: Dividend Yields, Rupee Tailwind and AI as an Integration Play

Raunak Onkar, research head and fund manager at PPFAS Mutual Fund, pointed to the sector's history. It has weathered multiple technology shifts as a high cash-generating, export-oriented business. AI, in his view, is the latest such shift, not an existential threat. “For a new technology like AI, clients would require some kind of hand-holding to implement it,” he said. The open question is whether that implementation still needs specialized talent–which the IT industry already has–or whether AI can do the implementation itself. Onkar called it a probabilistic call. Valuations, he said, look reasonably priced given the uncertainty.

Rajat Chandak, senior fund manager at ICICI Prudential Mutual Fund, argued that Indian IT firms could benefit in either outcome. If hyperscaler investments fail to generate adequate returns and the AI buildout slows, disruption fears ease. If adoption expands, enterprises will need help implementing AI models, agents and workflows at scale. “This is where software services companies can play an important role as system integrators,” he said. Chandak also highlighted dividend yields of 6-7% and free cash flow yields of 10-11%. Those, he said, provide a reasonable margin of safety while investors wait for the next growth trigger.

George Heber Joseph, chief investment officer at ASK Investment Managers, said his firm stayed away from IT for nearly two years on stretched valuations but has since moved to equal weight or slightly overweight after the correction. “Relative to the broader market, large-cap IT now looks quite attractive,” he said. Channel checks suggest business fundamentals haven't deteriorated materially, Joseph added. The valuation reset is concentrated at the top end. “Today you're getting businesses generating strong cash flows, attractive dividend yields and healthy free cash flow at valuations close to 15x-18x earnings on one-year forward basis,” he said. Large caps, with stronger balance sheets and global relationships, are better placed to ride out near-term revenue disruption from AI.

What the Bears See: Revenue Deflation and a Soft Q1

Rahul Singh, chief investment officer at Tata Mutual Fund, said the AI question still has too many unknowns. AI-driven productivity gains could lead to revenue deflation in traditional coding and low-end services, while AI adoption could create new opportunities. “The key question is timing: Will the revenue pressures come first, or will new opportunities offset them quickly?” he said. At present, risks appear skewed toward initial disruption, Singh said.

JP Morgan, in a June 2026 note, said its channel checks suggest the first quarter could be softer than expectations. Demand conditions that weakened in March showed no improvement through April and May, the brokerage said. That could drive cuts to dollar revenue estimates of 50-100 basis points. The weaker rupee may protect earnings per share. JP Morgan also warned that FY27 could be a year of muted growth with potential deceleration. “With no meaningful acceleration in year-on-year revenue growth, the AI narrative of deflation is likely to feel stronger,” the note said.

BOB Capital Markets went further. AI could shrink the IT industry's revenue over the next 24 to 36 months as companies self-cannibalize to hold on to existing clients, the brokerage said.

The same AI disruption story hit Infosys and TCS, cutting them 30%, though valuations had not fully reset. (A separate analysis examined that dynamic.)

For most investors, the simplest route is to let diversified equity fund managers handle sector allocation. Sector funds–passive or active–require getting both entry and exit right, which is difficult. Fund of funds that spread money across sectoral ETFs offer a middle ground but belong in a satellite portfolio, not the core.

Onkar summed up the trade: “It's a probabilistic call since it's not yet clear whether IT services are advantaged or disadvantaged by AI. Valuations look reasonably priced due to this uncertainty.”