IT Stocks: How much threat does AI boom pose to Indian companies? Big fall in IT stocks including TCS, Infosys, Wipro, whom to trust? – market

Biggest fall in IBM shares in 25 years

Monday’s session in the US stock market brought a setback for IBM. The company’s shares closed down 13.1% at $223.39. This fall is being counted among the biggest falls in a day since October 2000. The sharp selloff intensified the debate among investors about whether artificial intelligence is increasingly challenging the established business models of traditional tech companies.

There was growing concern in the market that new AI technologies could impact the services and systems on which IBM’s traditional business is based. The fear of pressure on business models, especially related to legacy software and maintenance, alerted investors, leading to heavy selling.

AI startup Anthropic has launched a new tool for its product Claude Code, which claims to make the process of converting old COBOL code into modern systems easier and faster. COBOL is a decades-old programming language and is still used in a large number of banking and financial systems in the US today.

It is estimated that approximately 95% of ATM transactions involve some form of COBOL based system. In such a situation, if AI makes this migration process faster and cheaper, then the traditional IT service model may be affected.

IBM has played an important role in popularizing COBOL and implementing it in large enterprise systems. Even today many large organizations depend on COBOL based systems running on IBM’s platform.

This is why investors fear that if AI tools are able to rapidly shift old coding languages ​​to modern platforms, then pressure on IBM’s traditional service and support business may increase.

Anthropic’s new AI ‘explosion’

Anthropic said Monday, Nov. 24 that cloud code can automate much of the exploration and analysis that increases the complexity of COBOL modernization. This is the core business area for tech company IBM. IBM has long sold mainframe systems optimized for large-scale transaction processing, where COBOL is used extensively.

Short for Common Business-Oriented Language, COBOL is a mainstream programming system developed in the late 1950s and commonly used in business data processing, including payment processing and retail transaction systems. According to Anthropic, about 95% of ATM transactions in the US still rely on COBOL, making it a potential target for cost-efficient AI disruption.

Anthropic said in its latest blog post that billions of lines of COBOL are run in production every day, powering essential systems in finance, airlines and government. Despite this, the number of people who understand it is decreasing every year.

Selling pressure on IT stocks began earlier this month after Anthropic introduced a new AI product designed to automate a variety of professional tasks. This renewed concerns that artificial intelligence could undermine the profits and competitive moots of traditional IT services companies. The company developing cloud chatbot said that its product can automate many legal tasks.

What is the market worried about?

A growing market concern is that AI could fundamentally reshape the competitive outlook for software and IT services firms, potentially undermining both profitability and market position.

Jefferies’ view on Indian IT sector

Jefferies has become cautious about India’s IT services sector. He warned that artificial intelligence could structurally change business models and drive down valuations, even as stocks have recovered this year. Despite the disappointment, Coforge, Sagility, and IKS Health are its favorite picks.

Despite IT stocks rising about 16% so far this year, Jefferies believes the risk-reward is still not good. The brokerage cut earnings per share estimates by 1-4% and cut the price target by 33%. It ‘Hold’ Infosys, HCLTech and Mphasis, and ‘Underperform’ TCS, LTIMindtree and Hexaware. Wipro still remains ‘underperform’.

Brokerages on Coforge, Sagility, IKS have given buy opinion.

AI will prove to be a big threat

In a note, the brokerage said AI is likely to shift the revenue mix towards consulting and implementation work, while traditional managed services will decline. Such changes could increase revenue cyclicality and require major changes in talent and operating models, increasing execution risk for companies.

Jefferies said that the third quarter results led to earnings upgrades for almost all IT firms, but investors’ focus has shifted to the medium to long-term impact of AI. The Nifty IT index has fallen nearly 14% and underperformed the broader Nifty 50, reflecting concerns that technology-driven efficiency gains could put pressure on pricing in core services.

The brokerage expects application managed services, which account for about 22-45% of the revenues of large IT firms, to face deflation as AI tools improve. More advisory and implementation work can support growth, but it may also require changes in delivery strategies and cost structures.

Risk of reduction in valuation

Jefferies estimates that current stock prices imply revenue growth of 6-14% for large IT firms and 9-17% compound annual growth for mid-sized players in FY26-36. These are lower than the historical growth rates for many companies, yet the brokerage sees scope for further decline in valuations.

Jefferies said that in the base case, there could be a slight upside to the price-to-earnings multiple for large IT firms, while mid-sized companies may be more likely to see a rerating. In the event of a downturn, stocks could face a further downrating of 30-65%, especially if revenue growth slows significantly.

Jefferies expects the sector’s earnings CAGR to be around 6% during FY26-28, while Coforge, Sagility and IKS are expected to grow at a faster rate of 19-25% each.

What are the challenges for IT companies?

Brokerage CLSA said that the fear of slowdown due to AI is very high among Indian IT services companies. The brokerage took a measured stance on the sector, and maintained a bullish view on select stocks such as Infosys, Tech Mahindra, Coforge and Persistent Systems. However, it cut price targets on all, citing persistent valuation de-rating.

In a note, CLSA said that despite the growing debate over AI-driven slowdown, there has been no significant change so far in client spending patterns, deal structures and service mix. According to the brokerage, AI is still being adopted as a lever for increasing efficiency and productivity, rather than as a wholesale replacement for traditional IT services, allaying concerns that AI could sharply reduce managed services revenues or add pricing pressure.

However, CLSA said valuations remain under pressure. This raises doubts over medium to long term growth visibility. The brokerage said that the de-rating challenge remains even though the managements of the companies are showing confidence about the stabilization of demand and possible cyclical recovery next year.

Disclaimer: This article is for informational purposes only and should not be construed as investment advice in any way. ET NOW Swadesh recommends its readers and viewers to consult their financial advisors before taking any money-related decisions.