IT stock crash! Rs 2.5 lakh crore erased in 3 Days — What should investors do?

IT stock investors are struggling with sharp losses as the sector is going through a phase of massive sell offs. In the past three trading sessions, Nifty IT index has plunged almost 8%, erroding almost Rs 2.5 lakh crore from the market value. Traders are also concerned about concerns over AI automation, that could majorly disrupt the traditional outsourcing model.The recent market turbulence arose from two key developments:

The latter claim rattled investors, as ERP implementation was previously considered largely immune to AI disruption. Motilal Oswal’s Abhishek Pathak offered a stark assessment of the potential impact. “Assuming a 30–50% productivity hit on low-level work in these areas, we believe 9–12% of IT services revenue stands to be eliminated. We expect this to happen over three to four years, underscoring a ~2% hit on revenue growth each year,” he told ET. He noted that before Palantir’s comments, 30–40% of IT services revenues were already thought to be at risk from AI deflation, particularly in application development, maintenance, and testing.Pathak warned that the scope of AI’s disruption could expand. “If ERP migration and third-party enterprise software, which accounts for 10–15% of industry revenues, come under the purview of AI, the hit from AI would be higher,” he said. The selloff intensified after Palantir’s earnings call highlighted AI’s potential in areas that were once considered safe haven. “The key catalyst was the Palantir earnings call, which highlighted how the company is upending pay-per-seat software such as Workday and ServiceNow, as well as third-party software with its own AI offerings,” Pathak said.Additional factors weighed on sentiment. “Anthropic’s entry into automating low-level legal services work and Gartner’s muted guidance also had a bearing on sentiment,” Pathak added. “While AI’s threat to software coding hours was well known, Palantir’s comments put ERP implementation into the spotlight, which so far was considered less impacted by AI’s productivity gains.”

What’s the outlook?

Historical experience suggests that such disruption, while challenging, can ultimately benefit the industry. “AI will render much of legacy software and testing redundant. Just like hyperscalers were initially a significant headwind to infrastructure management services, and BPO got disrupted in an earlier cycle in 2015,” Pathak noted. “Many legacy IMS and BPO roles do not exist anymore, but cloud migration over a five-year period proved accretive for the industry.”He added that the transition period can be bumpy. “During the early cloud build-out phase in 2016–17, hyperscaler capex expansion initially acted as a revenue headwind for Indian IT services as enterprises paused traditional outsourcing in favour of direct cloud investments. Once the capex cycle normalised, industry growth re-accelerated sharply.”Some analysts, however, see a more positive outlook for IT services compared with software firms. BofA Securities’ Amish Shah explained, “We think that the plug-ins being released by AI companies matter more for the software companies and do not change much for the IT services companies. The broader developments around AI’s use in business have been moving more constructively over the past few months. Companies have been highlighting the increasing opportunity available for them as more AI pilots go into an implementation phase and that their partnership with AI-first companies is driving up demand for enterprise-grade AI solutions.”Shah also acknowledged emerging concerns. “There has been associated news flow that claims AI tools are helping finish SAP migration in a few weeks versus taking a few years earlier. This has become a new topic of discussion around deflation risk levels in the IT services sector.”From a technical standpoint, the Nifty IT index is at a crucial level, holding 35,400 on a closing basis. “However, a breakdown below this level could potentially create mayhem in the sector,” said Rupak De, Senior Technical Analyst at LKP Securities. “On the other hand, if the index sustains above 35,400, we can expect a meaningful price recovery in the IT space.”With large-cap IT stocks trading at around 20 times one-year forward earnings, slightly below their 10-year average, Shah recommended caution. “We would continue to maintain a selective stance on the sector and prefer only those companies where visibility of acceleration in growth in FY27 is high, backed by their ability to participate in AI services spends and where there is a proactive and concerted push towards an AI-led operating model,” he told ET.Unmesh Sharma of HDFC Securities offered a balanced view, “We have a neutral position on Indian IT companies in our model portfolio and we continue to hold that.” The expert added that although India may not lead in AI innovation, Indian companies are expected to play a significant role in implementing AI solutions across the corporate sector.