What to make of the Indian IT carnage?

In today’s Finshots, we break down the Indian IT sales and what it means for you as an investor.

The Story

Over the past 12 months, the Nifty IT index has fallen 21%. And nearly 95% of that fall has occurred in just the past one month. In fact, this is the worst decline in 23 years.

To give you a sense of scale, companies in the NIFTY IT index collectively lost over ₹6 lakh crore in market value in a single month. And unless you’ve been living under a rock, you probably know why.

One word. Anthropic.

In early February 2026, it introduced a set of “agent” AI tools powered by its Claude model. These are tools that not only help you write a few lines of code, but can handle entire engineering tasks on their own—write code, test it, fix bugs, deploy it, and even monitor performance after launch.

One good example is Claude Code. It can work with old programming languages ​​such as COBOL (Common Business Oriented Language), a 60-year-old system still used in banking. It can scan massive code bases, understand how everything connects, document it and even convert it into modern languages ​​like Java or Python.

Simply put, instead of telling a developer “Hey, code this feature,” you tell the AI, “Build, test, deploy, and maintain this entire system,” and it does most of the work with minimal supervision.

And that kind of scared investors because these are exactly the kind of services Indian IT firms have traditionally billed their global clients for. Because these customers have been coming to Indian companies for decades because we had large teams of engineers who could customize software, test it, maintain it, fix bugs and perform support operations – all at lower cost.

Furthermore, application maintenance and minor upgrades such as routine fixes and updates have historically contributed nearly half of the revenue for many firms. And these are exactly the tasks that AI now claims it can automate. What required eleven years and “armies of consultants” can now happen in months.

And naturally, investors panicked. If US customers, who make up the bulk of Indian IT revenue, start thinking, “Why pay for a 50-member team when AI can do it cheaper and faster?”, it hits the core business model.

And that explains why Indian IT stocks have seen such a sharp sell-off.

But is this panic fully justified, you ask?

Well, first things first. It is true that agentic AI could hurt Indian IT businesses. For context, earlier, major contracts signed by Indian IT firms used to last around five years. When customers renew, companies would offer discounts of around 15–20%. It was normal. But now, with AI promising higher automation and lower costs, customers are asking for bigger discounts — closer to 20–30%. This puts pressure on both revenues and margins, meaning that in the short term, income may slow to around 6–7% annual growth.

But this is only the short-term picture.

When you look at the sector as an investor, the bigger question is what happens in the long term.

And this is where things get interesting. The current ground reality looks very different from the panic in the markets. Investors seem to be reacting as if AI will completely wipe out Indian IT companies in a few years.

But is it realistic?

Manish Sonthalia, Director and Chief Investment Officer at Emkay Investment Managers, shared a simple example with The Economic Times. A few years ago, when electric vehicles (EVs) became the next big thing, markets almost wrote off traditional fuel-based vehicles or ICE (internal combustion engine) cars. The assumption was that they would soon become obsolete. But it didn’t happen. In fact, shares of companies linked to ICE vehicles, including automakers and component makers, rose three to four times.

It simply tells you how markets sometimes overreact to disruption. And reality often turns out to be more balanced than the initial fear. The AI ​​effect on Indian IT could be very similar.

Just because agentic AI has arrived does not automatically mean that Indian IT or SaaS (software as a service) companies will become obsolete. If anyone believes this, they probably haven’t spent much time working within enterprise IT. And it’s not us saying that. It is Bernard GoldenCEO of Navica, an American technology consulting and investment firm.

According to him, AI certainly makes coding easier. But writing code is only a small part of building real enterprise software. Business software is not just lines of code. This involves industry knowledge, regulatory compliance, security controls, legal contracts, customization for large clients, integrations with dozens of other systems, continuous upgrades and long-term maintenance. There are sales teams, support desks and consultants helping customers across countries.

Along with software, large companies also buy reliability and accountability. This means they need vendors who can work in 20 countries, provide local support, handle complex contracts and accept legal responsibility if something goes wrong. An internal IT team can’t just simply replicate this, just because AI can generate code faster.

Golden also points out something very interesting. In the past, many companies tried to build their own systems with the idea that they would be cheaper or more efficient. But most underestimated the complexity and failed. And eventually they went back to established vendors.

So writing obituaries for Indian IT companies may seem a bit premature.

And that can give you a good reason to look on the bright side of this in the long run.

See, currently nearly 80% of enterprise IT spending goes to maintenance and only a small portion goes to actual innovation. But if AI reduces maintenance costs, companies won’t suddenly reduce their overall technology budgets. This is because in large organizations, once you cut a budget, it is very difficult to get it increased again. So most firms prefer to keep the budget intact.

This means the same budget, but more room for innovation.

In fact, AI can even reduce the risks associated with innovation. Take a bank that still uses decades-old code written by long-retired engineers. Moving that system to modern software is risky and expensive. But if AI can understand old code, translate, test and reduce errors, the risk drops sharply. It is not a threat. It’s an opportunity, right?

So how should you, as an investor, read it all in?

Well, one option is to follow the herd. Sell ​​now and worry about AI later. Many foreign investors have done just that, moving money into “AI infrastructure” themes such as chips, power and domestic cyclical stocks.

But for long-term investors, this may not be the smartest move.

Now, it’s true that the old model – invoicing clients for large teams and long hours – could see pressure. Lower-end, people-heavy work may face slower growth over the next 3-5 years. But Indian IT companies have adapted before. They moved from Y2K solutions to client-server, then from on-premise to cloud. Now the shift may be from sales hours to sales outcomes and AI-powered platforms.

Interestingly, this selloff also caused valuations to cool. Indian IT stocks once traded at a 30–40% premium to US peers. Now many trade at around 21 times earnings (p/e), narrowing the gap to around 15–20%. This means they are closer to fair value. For investors who stayed away because they looked expensive, this reset isn’t necessarily a bad thing.

Because in the end it’s not just about Anthropic or one AI demo. Remember how markets overreacted in 2021 with extreme optimism about SaaS and AI? Anything with “SaaS” or “AI” in its name traded as if it would grow at 50% forever.

But today we are seeing the exact opposite or a pessimistic overreaction. Profitable, cash-rich IT companies are suddenly being treated like they’re obsolete, all because a slick demo video made AI seem unstoppable.

And if history is any guide, neither extreme usually holds.

Until next time…

Don’t forget to share this story with a friend or family member who is biting their nails about Indian IT sales, or even with curious strangers on WhatsApp, LinkedIn and x.

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