Indian IT Stocks Take a Beating as AI Automation Tools Signal an Agentic Shift
Shares of India's leading information technology services companies experienced a significant downturn in early trading on Wednesday, mirroring declines in US technology stocks. This sell-off was triggered by announcements from American AI firms Palantir and Anthropic, which unveiled new automation tools that directly threaten a crucial revenue stream for Indian IT giants.
Palantir's Hivemind AI Targets Legacy System Migration
During its earnings announcement on Monday, Palantir revealed that its Hivemind AI platform can now autonomously migrate data from aging legacy systems. This capability strikes at the heart of what has been a fundamental revenue source for Indian IT firms for decades. The autonomous data migration functionality represents a direct challenge to the traditional outsourcing model that has sustained companies like Tata Consultancy Services, Infosys, HCL Technologies, Wipro, and Tech Mahindra.
In early trading, these companies saw substantial declines: Tata Consultancy Services fell 5.1%, Infosys dropped 5.96%, HCL Technologies declined 4.94%, Wipro decreased 3.36%, and Tech Mahindra slipped 4.61%. These movements followed similar drops in their American depository receipts on the New York Stock Exchange the previous day, where Infosys shares fell 5.56% and Wipro shares declined 4.83%.
Anthropic's Claude Cowork Adds to Automation Pressure
Adding to the sector's concerns, generative AI startup Anthropic upgraded its Claude Cowork AI agent last Friday with specialized plug-ins designed to automate core business functions. These enhancements allow the AI agent to move beyond simple conversation and execute multi-step workflows directly within company files and applications.
The new tools can autonomously track, review, and summarize legal documents, or connect directly to data dashboards and spreadsheets to analyze trends and generate financial models. This expansion of AI capabilities into complex business processes represents another area where automation could reduce demand for traditional IT services.
Expert Analysis Points to Structural Challenges
Srikanth Velamakanni, co-founder of AI solutions provider Fractal, attributed the stock declines directly to these new AI automation tools. "In India, a lot of enterprise services rely on unstructured data. Those stocks are clearly going to be compressed because AI models are increasingly doing an amazing job of interpreting unstructured data – video, voice or text," Velamakanni explained.
He further noted that "any service that is about processing these data sources will get compressed and will get impacted. A lot of the work that tech services companies do is around working with structured data in a very complex enterprise context. So they will be protected a little bit more, but their stocks also might see some correction in the short term."
Broader Market Uncertainty Compounds Challenges
The decline in IT stocks is occurring against a backdrop of heightened uncertainty and reduced demand for traditional IT services. Tariff fluctuations under US President Donald Trump's administration and geopolitical tensions around key Middle Eastern trade routes have prompted Fortune companies to reduce technology spending and redirect funds to core business operations.
This environment is reflected in the muted growth of India's largest IT services firms, which now face the prospect of a second consecutive year with growth potentially below 5%. Experts suggest that AI automation tools could further reduce demand for human involvement in tasks such as coding, software development, and maintenance, effectively shrinking billable hours for Indian IT companies.
Analysts Predict Limited Growth Due to AI Impact
Financial analysts at Jefferies have projected that artificial intelligence is likely to limit growth in the IT services market to 1.5%-3% compound annual growth rate between 2024 and 2029. Their analysis cites three key reasons: clients may delay IT spending due to concerns that rapid AI advancements could render current investments obsolete; AI-led productivity gains could impact existing IT services revenues by 20% over fiscal years 2025-2030; and clients have not fully realized returns on elevated incremental technology spending averaging $280 billion from 2021-2024 compared to $130 billion from 2016-2020.
Historical Context Reveals Shifting Landscape
The current market reaction stands in stark contrast to the response when ChatGPT was launched on November 30, 2022. On that day, shares of TCS and HCLTech declined modestly by 0.1% and 0.65% respectively, while Infosys, Wipro, and Tech Mahindra actually saw slight gains. Since that time, however, shares of TCS, Infosys, and Wipro have declined by 2.1%, 4.5%, and 14.8% respectively, while HCLTech has gained 44% and Tech Mahindra has increased by 52%.
This divergence in performance highlights how different companies within the sector are responding to the AI revolution. The broader BSE Sensex has gained 33% over this same period, indicating that the challenges facing IT stocks are sector-specific rather than reflective of the overall market.
The combination of advancing AI automation capabilities, changing client spending patterns, and geopolitical uncertainties has created a perfect storm for Indian IT services companies. As artificial intelligence continues to evolve and automate tasks that were previously performed by human teams, the traditional business models of these firms face unprecedented pressure to adapt and transform.
