A gauge including Tata Consultancy Services Ltd. and Infosys Ltd. has shed $56 billion in combined market value since Anthropic PBC released a tool seen as a threat to their business models. The slide in Indian tech firms has stood out in Asia, a region whose large hardware industry is seen as indispensable to the AI ecosystem.

Analysts at HSBC Holdings Plc and JPMorgan Chase & Co. said worries may be overdone, as Indian IT firms stand to gain from more customers requiring help integrating artificial intelligence into their operations. Investors including PPFAS Mutual Fund say the sector will be able to flexibly respond to changes.

“Every time there’s a technological shift, IT companies have adapted, reskilled their staff and ensured client needs are being met,” said Raunak Onkar, research head and fund manager at $17 billion PPFAS, which added shares of Indian software makers to its portfolio last month. The companies have had success because they can quickly offer affordable knowhow, he added.

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The optimism shows how some investors are betting that the recent selloff in India’s software companies has the potential to reverse. Technology stocks have been roiled globally by worries over the impact of AI tools on businesses, particularly, those that are built on winning productivity gains for companies.

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The NSE Nifty IT Index has slumped 15% since Anthropic’s announcement earlier this month, on track for its worst month since March 2020. While software-heavy Chinese and Australian tech stocks have also been hit, losses have been a particular concern in the cohort that was seen as a flagbearer of India’s growth story.
The nation’s IT outsourcers rose to prominence in the late 1990s by helping Western companies solve the Y2K bug, which had threatened computer chaos at the turn of the millennium. Since then companies have survived fluctuations in global growth from a series of crises, as well as the dawns of new technologies from mobile telecommunications to cloud computing.Now the software business model is seen at risk of obsolescence from the rise of AI and robotics. But analysts like Stephen Bersey at HSBC see such views as “flawed and illogical.”

“To optimally unlock the potential of the ‘generated’ information that AI produces, software is needed to orchestrate the overall digital interactions between AI and non-AI system enterprise components,” he wrote in a note dated Feb. 9. “India based companies have had the ability to create and market enterprise class software for decades … at scale.”

Skeptics are particularly worried about the potential for AI’s productivity improvements to eat into earnings for IT outsourcers. For Phanisekhar Ponangi, co-founder of Mavenark Asset Managers Pvt., “the scare is real.”

“Over the last 30 years, IT businesses succeeded by saying they would improve productivity,” he said. The industry is set for a big change as AI compresses project timelines and reduces the number of workers needed, while “the client will pocket the productivity gains.”

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Others argue that the sector has seen what’s coming and is prepared. Companies are increasingly talking about AI on their earnings calls, and even disclosing related revenues. TCS in January said AI solutions now generate $1.8 billion in annualized revenue for the company and are growing at around 17% quarter-on-quarter.

Manu Rishi Guptha, a portfolio manager at MRG Capital, said the market is also overlooking two cushions for Indian IT firms: large cash piles that can fund shifts as AI disrupts business models, and a relatively young workforce that can adapt quickly.

The stock meltdown may actually be an “opportunity in disguise,” Guptha said, adding that the industry is seeing resilient order flows and share valuations have dropped. The Nifty IT gauge is trading at 20 times forward earnings estimates, the lowest level since April 2023.