₹18 Lakh Crore Wiped Out From Indian IT Sector! Is The Worst Over?

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[00:00:21] Hey folks, CA Rachana Ranade here and I welcome you all to a video which I feel many people would be really looking out for because today's video is about a sector which has given a lot of pain for a lot of people. I'm sure you have guessed it right. It is about the IT industry. In this video, we are going to understand top five points about the industry which are something like first we'll understand the Indian IT sector space right now and its performance. Then we'll talk about why IT stocks are going down. Is it mainly because of the IT sector?

[00:00:50] of the AI led disruption? Then we'll talk about what are the parameters or what are the key performance indicators that we should check while we are tracking their upcoming con calls. Then we'll talk about certain risks that we have to watch out for and very important point if I were to compare IT mid caps versus IT large caps which out of these two are placed better. What if your trading view charts could automatically generate buy and sell signals for you? This is actually possible using PineScript on trading view and the

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[00:02:18] IT performance and for that I'm going to compare the returns of Nifty IT versus Nifty over a period of last one year. Now if you have a look at this, you will understand that Nifty IT has given a negative return of 23.25% whereas Nifty has given a negative return of 4.12%. And if I were to compare the Nifty IT peak which was at 46,000 plus in December 24, it hit a rock bottom

[00:02:42] of 27,078 in this same month May 2026 and because of which IT related market cap was wiped out to the tune of 18 lakh crore rupees. But has the financial performance of the big names has been has it been really bad or not? For that let's have a look at this data point. And you will see that there are all these five big names and five so five large caps, five mid caps is what you can see on screen.

[00:03:07] And if I check the three year sales growth, have a look at this one, two, three, four, five, all these are large caps. And they have given a sales growth of what single digit. And if I were to give you an example of Wipro, Wipro is like 0.78% sales growth, three year sales growth I'm talking about. And if I were to check profit growth for last three years, again, if I were to check top five, same story, the profit growth for three years has been again in single digit. And because of this, you can see that there has been a clear

[00:03:36] derating in the P where the historical piece are in the space of 20s for Tech Mahindra. In fact, it was 35. You can see every single stock the P has been derated and it has gone down to 15, 15 P, 15, 18, whatever. So is there a clear poor financial performance? Yes. Can we see that getting reflected in P D rating? Answer is yes. But two names stand out very clearly. One is persistent, one is co-forged. And if you have a look at this, you will see that

[00:04:06] their three year sales growth for persistent, it's 20% for profit growth also, it is 27% and 30% respectively. And if you see their PE is higher as compared to the big names, but their PEG is at 1.5 and 1.2 respectively. So what do we come to know with this? That they are growing at a fast pace,

[00:04:32] but this fast growth has already been considered in their PE's. So it will be again interesting to see whether persistent and co-forged are able to continue with the same growth rates. So if you have understood this in the next section, we'll talk about how FIIs are approaching the overall IT industry. Now if you have a look at this same chart again, you will understand that in all the major names, FIIs have in fact reduced their stakes and that's the reason why you'll see all these minuses coming into picture.

[00:05:01] There are only three names where there is a positive change. One is Wipro, one is persistent and one is emphasis. Okay. So we need to understand that is it only the weak financial performance because of which FIIs are reducing their stake? Or is there any other pain point in the IT industry because of which FIIs are actually reducing their stake? And I'm sure everyone already knows the answer. The answer is AI, right?

[00:05:25] Now, all the investors, be it FIIs or DIs, they would want to increase their exposure to AIs. Unfortunately, India does not have a major exposure to AI or AI related things. So for example, if I'm talking about memory chips or GPUs or data centers, AI chips, cloud. So I'm not saying we don't have an exposure. We have a minimal exposure is what I'm saying.

[00:05:48] So all these investors would want to shift the weightage to certain companies, which may be in other countries as well, but who have a good exposure to AI. And which are these countries? I'm sure you have been reading it in the news already. There are a lot of retail individual investors who are like, we must increase our portfolio in South Korea, in Taiwan, where all this AI thing is buzzing.

[00:06:11] But before you take any decision, have a look at these numbers. If you see South Korea is already up by 203% in the last one year. Taiwan is already up by 80.7% in the last one year. And we see all other countries as well, double digit return for a lot of them. India also has double digit, but in minus. Okay, so I know it hurts a lot. After a long time, we are underperforming to this great extent.

[00:06:37] By the way, this is like a 12 month return that I've discussed right now. Okay. But all in all, you can see that we are not placed very nicely in this entire AI space. Investors are also looking at undervalued opportunities and India was kind of overvalued some up until some time ago. So, money was flowing out of our capital markets, plus commodity cycles were in some other countries favors.

[00:07:03] Valuation re-rating, broad macro, so many things that were playing out because of which money was moving out of Indian IT sector and was being pumped into countries like South Korea and Taiwan. Now, this is about the AI impact. Many people also ask me that, Rachana, will the war also impact IT sector or not? Of course, there is no direct impact per se, but please understand, there will be a lot of companies which will be giving projects to the IT companies.

[00:07:31] Now, because of this uncertainty, maybe companies would want to delay their IT projects, which are not extremely crucial. And the moment projects get delayed, the revenue for IT companies also gets stalled or gets delayed. So, war will not have a direct impact, but surely will have an indirect impact. In the next section, we will talk about again a very, very important point, which is about AI led disruption in a more detail. Well, FIIs are surely not liking this space right now. And in fact, the currency depreciation is also acting against them.

[00:08:00] So, they are giving a big dislike to this entire sector. But if you are liking the video till now, please don't forget to smash the like button. And if you are still not subscribed to our channel, do that as well right away and hit the bell icon. Now, let's understand the IT sector in a little bit more detail. You can see these are the five categories wherein I can overall broadly classify the entire IT sector. But today, we are not going to focus on these balance sheets. So, let's take these away and we'll focus only on the top two categories for our video.

[00:08:29] One is large cap IT stocks and one is mid cap IT stocks. First, we also need to quickly understand how the overall business model works for IT companies. It's mainly a labor arbitrage model. And what do I mean by that? Let's take an example. I am one of the top level management of one of the large IT caps. And what I do is let's say I pay my employees thousand rupees per hour. Okay. But what will I charge to my client? I'll charge at least three thousand or four thousand rupees per hour to my client. And this difference is nothing but my profit.

[00:09:00] That's my arbitrage. Okay. Now, typically IT industry works on a B2B model. That is clear. It works on the arbitrage of how much money is paid to the employee versus the client. That is absolutely clear. But now we need to understand that things are changing because of AI. Rather than billing on an hourly basis, the clients are demanding that you bill us for an entire project. So, why is this happening? That's happening primarily because of the AI led disruption. But is the disruption only negative? Answer is no.

[00:09:29] There are certain positive pointers as well. Now, because of the AI integration, because of the AI transformation, a lot of automation is being built into a lot of companies. And that is the reason why clients sometimes are also ready to pay a premium so that these IT companies can help the clients to integrate AI into their system. And so that the clients can effectively do some sort of cost saving in the coming years.

[00:09:55] But then the big problem is that it's not only the positive side. There is a bigger negative side as well. And to understand this negative side of AI, what we did is that we went through the con calls of so many IT companies. But out of all the con calls, one con call that caught our attention was HCL techs con call. And a specific question was asked to was asked by Mr. Kumar Rakesh. And he asked, what about the deal TCV? TCV is the total contract value and the AI impact.

[00:10:25] And the explanation that he gave was something really interesting. Now, imagine this. There is a pie. Okay. Let's say 100 rupees worth contracts are being received by the entire IT industry. Out of this 100 AI, a pie, 40%, that is 40 rupees is termed as AI disrupted. Now, why we are calling that as AI disrupted?

[00:10:49] Because this was majorly about, okay, develop an app for us, develop some customer support system for us. So, this is where the large cap IT companies were coming into play. And they were billing on an hourly basis. Now, what are the clients telling them? But because of AI, the number of man hours will be less, bill us less. And this 40% pie may shrink down to 25 is what was mentioned in this con call.

[00:11:18] So, this is where the large cap IT players are actually facing the problem. Okay. Now, let's talk about a very small pie, which is 5%. And this is called as the AI native. I can give you an example of an agentic AI here. And this is where mid caps or small caps are actually taking a higher advantage. For example, what are mid cap IT stocks telling? We will automate processes for you. We will ensure that with agentic AIs,

[00:11:44] we will cut down your employee costs to a great extent and also improve overall efficiency in the organization. And in the same con call, it was mentioned that maybe this is a very small pie right now, which is 5%. But this pie can actually grow up to 20% in the coming four or five years. Okay. And the balance 55% is like an AI amplified pie in the trunk, which is about normal things. It can be like cloud. It can be like cybersecurity.

[00:12:13] And this is a space where large caps are also competing and mid caps are also competing. But this is again expected to grow around 10% over the next four to five years. So, just to wrap up things quickly, the bigger pie, 40%, that's the AI disrupted. This is where large caps are facing the pain. The small 5% which is expected to grow at a faster pace. This is where mid caps are actually getting benefited. And the balance 55% is the space where large caps and mid caps are competing with each other.

[00:12:41] Now, let's also understand about some important pointers, what to look for going forward. And again, I'm going to go back to the HCL Tech Concall. And here there's a very nice explanation given by Mr. C. Vijay Kumar. And he says that what we need to look going forward is will there be deflation in the TCVs? TCVs is what? Total contract values. And what has he mentioned?

[00:13:04] He says, I mean, $100 million deal would be much lesser today, maybe $80 million just on a rough ballpark. So, what does he say? Earlier, we used to charge $100 million for a specific project. Now, the client is also saying, but now because of AI, even your cost will be less. Number of man hours that will be required for that, that will be less. So, we will not pay you $100 million. And that is the reason why he is saying that the TCV or the total contract value is getting deflated.

[00:13:31] And the same contract which would have fetched $100 million is now fetching $80 million. So, we will have to check whether such deflation even exists in the upcoming years or not. Plus, what does he mention is that, but technically, it does require at least 25 to 30% more effort to convert and get to the same number. So, he is saying we have to convince so much. We have to put in more efforts to even convince at that $80 million mark.

[00:13:55] One more very important point he has mentioned that we have walked away from some deals which will not make sense. And that would have easily contributed to at least $1 billion or more. So, this is something very interesting. They are saying that for almost more than a billion dollar contracts, they have walked away. Why? Because the client is actually maybe asking for lower and lower and lower value.

[00:14:21] It's as good as ProMax bargaining that is happening in the IT space right now for certain projects. So, it will be really interesting to see whether the companies are willing to change their business model totally from, like I was mentioning, right? Like from instead of per hour basis to some how many tokens are we using in AI. In fact, the token point was also mentioned in one of the con calls. I think it was Tech Mahindra con call where it was mentioned. So, it will be really interesting to see how they are actually changing the business model. That is one thing that you have to look out for.

[00:14:50] Second thing that you should also check is how much is the quarterly AI revenue that they are generating. Do company give disclosures about that? Of course, yes. Have a look at this. These are the companies that have very clearly given how much revenue did they generate from AI. And look at these. These are not small numbers at all, right? So, if these numbers keep on growing, it will be a good sign for our IT space. Third thing that you have to look out for is whether AI revenue is outpacing the compression. Compression, the point that I told you right now.

[00:15:18] The $100 million deal being compressed at $80 million. So, is there a revenue loss here? Yes. But if the AI generated revenues are able to outpace that, will that be a good sign? Answer is yes. But the only thing is that none of the management in any of their commentaries have mentioned what could be the inflection point. By when can the AI revenue actually outpace the compression? No one has mentioned. But that's what we have to keep on looking for in these con calls.

[00:15:46] Number four, we have to also check for margin sustainability. Because with the current margins, so TCS is targeting 26% margin on a longer term basis. Wipro is trying to maintain 17%. Infosys is guiding 22-22%. HCL Tech is guiding 17.5% to 18.5%. So, though they are guiding double digit margins, it's again important to see that whether they are investing heavily in AI capabilities. So, more they invest, maybe they'll be able to do a better cost saving.

[00:16:14] We will also have to incorporate one more point here that there will be wage hikes, right? Especially the year-end wage hikes. With that wage hike, whether they are able to sustain onto these margins or not, we will have to check that going forward. And ultimately, like I told you, whether the business models are changing from an effort base to outcome base. So, all these points, top five points is that we discussed right now. All these is what we have to check in the upcoming con calls. Now, let's focus on certain things to watch out for.

[00:16:43] Some could be like risks as well, right? So, first point is a mixed bag. It's a good one to watch out for, but that comes up with a risk. Just to give you an example. In October 2025, TCS announced to invest $6 to $7 billion in building data centers. Now, once the data center is complete, after that, revenues will start flowing 18 to 24 months after that, okay? So, is the investment big enough? Yes, it's $6 to $7 billion. How big data center are they building?

[00:17:12] They are building a data center of 1 gigawatt. Now, out of this, 100 megawatts has already been committed to OpenAI, okay? So, good out of 1 gigawatt, sorry, 100 megawatt has already been committed to OpenAI, agreed. But the overall investment is a huge investment. It's $6 to $7 billion. If they are able to utilize that entire capacity, that will be a great thing. So, that is what we have to watch out for.

[00:17:37] But if they are not able to complete it within the set timelines, and even if it is complete, if customers don't use that, in that case, that can also be a risk that we have to watch out for. Number two risk that we have to also watch out for is, again, the cannibalization, the point that I just mentioned right now, where there are a lot of AI native boutiques or hyperscaler startups where they are using AI to such a maddening extent that they are actually offering their

[00:18:07] services at cutthroat prices. The point that I already mentioned, right? Extreme competition. Will that somewhere drain the profit margins? That is obviously yes. In fact, both TCS and Infosys, without naming the competitor, they have mentioned that there are some competitors who are pricing deals at levels that appear economically irrational, possibly enabled by AI productivity models that incumbents don't maybe fully understand yet.

[00:18:37] So, there is crazy competition. That is a risk to watch out for sure. And ultimately, the last risk is about the GCC or the global capacity centers. Just to give you a few examples, Mastercard and Vanguard, they have already set up their GCC centers in India. So, what is happening is that instead of giving IT related work to some other IT company, they are doing that like an in-house in a GCC. Who can be at a bigger risk?

[00:19:04] That is the mid-cap stocks because they are the ones who have a bigger exposure in the BFSI space. Now, let us understand whether mid-caps are placed better than large caps in spite of the risks that we discussed right now. Just to give you some examples, be it emphasis or persistent or co-forge, you can see here in dollar terms, they have done way better as compared to Wipro, TCS or HCL or even something like an Infosys and the divergence is stark. It is structural. It does not look like it is cyclical. But then what could be the reasons why they are performing pretty well?

[00:19:34] Multiple results. I am just going to give you three, four important ones. Number one is their revenue mix. The point that I already told you that mid-caps are mainly focusing on AI transformation related things. It's more towards, you know, integrating AI into their client workflows rather than commoditized kind of a business. So, that's where they are at an advantage. Number two, they are okay with smaller total contract value.

[00:19:58] So, for them, a million dollar contract is definitely something which can be worth for all these smaller, smaller size contracts, at least move the needle for them for a totality bigger revenue. But like I told you, right, the previous company that's HCL Tech, Concall itself mentioned that one billion dollar contracts we might have let go. But these are going to be cannibalized by whom? By these mid-caps. Number three point, very important. This was in Coforge's Concall where Mr. Sudhir Singh mentioned that mid-caps have a core

[00:20:28] structural advantage. They said, we don't have hundreds and thousands of employees where we will have to train thousands of them on how AI can be integrated. Of course, they'll be leaner as compared to large caps. And for them, training lower number of employees for integrating AI into the workflows is going to be easier. And that acts as an advantage for mid-caps. One more very important point that I came across is the PE channel as a structural growth driver.

[00:20:57] Now, what happens is that for mid-cap companies, there are a lot of US-based clients who are funded by PE players, private equity players. Now, these private equity players, they keep on nagging these companies, the US companies that we want higher margins, we want more EBITDA, this, that. How will they be able to achieve that? If they're able to incorporate AI into their workflows, their cost will reduce. And because of which, then these PE investors will be happy.

[00:21:25] But if they were to integrate AI into their workflows, whom are they going to give their contracts to? To ideally these mid-cap companies. And in fact, I found this in Persistence Concall where they talked about using SASVA. I don't know whether they call it as SASVA or SASVA. They are using such platforms to reduce the costs at PE portfolio companies. And it's like a greenfield market that they are mentioning that large caps are not really focusing on due to the deal size constraints.

[00:21:54] So all in all, I hope you have understood a lot about IT space. If you do own IT stocks and if you have any specific questions, please ask them in the comment section. We'll try our level best to answer your queries. I hope you found a lot of value in today's video. I'll see you in the next one. Till then, take care. Bye-bye.