AI jitters hit IT stocks, but fund managers stay the course on sector holding for now

On an average, as per December 2025 allocation data from MOFSL, fund houses are underweight on the sector (7.9%) against the BSE 200 weight of 8.7 percent. February data for all fund houses is not available yet.

• IT stocks plummet on AI disruption fears, Nifty IT hits 10-month low.
• Fund managers: Market reaction ahead of fundamentals, no major action yet
• Valuations reset, but IT companies' deal flow and revenue stay steady.

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The sharp selloff in IT stocks over the past few weeks, triggered by global concerns around artificial intelligence-led disruption, has rattled investors and compressed valuations. Yet fund managers say that the market reaction may be running ahead of fundamentals.

Technology stocks have been among the biggest drags on benchmark indices in recent sessions after the rollout of advanced AI tools by Anthropic unsettled global tech counters and spilled over into Indian markets. The growing narrative that generative AI could cannibalise traditional IT services revenues, particularly in areas such as ERP implementations and legacy system management, has weighed heavily on sentiment.

After witnessing a 7 percent decline in the previous week, IT stocks remained under pressure, falling another 6 percent so far this week and dragging the Nifty IT index to a 10-month low on February 12. The correction has been accompanied by a clear valuation reset. According to Bloomberg data, TCS has seen its P/E multiple contract from 29.0 times at peak to 19.7 times, Infosys from 29.2 times to 20.3 times, Wipro from 25.7 times to 17.4 times and HCL Technologies from 27.0 times to 23.9 times. Tech Mahindra has eased from 36.6 times to 32.8 times. Among mid-tier players, Coforge has corrected from 58.4 times to 39.1 times and Persistent Systems from 65.8 times to 49.2 times. The broader Nifty IT index P/E has moderated from 28.3 times to 24.7 times.

No major action but keeping an eye on the space 

Despite the drawdown, fund managers maintain that they are not in a hurry to make major changes.

“There is no indication of a massive deflation at this point,” said George Thomas, Fund Manager at Quantum MF, pointing to steady deal wins and sequential revenue performance. “Channel checks suggest that enterprise-wide AI adoption has not yet occurred,” he said.

However, he acknowledged that uncertainty persists. “The main concern currently is macroeconomic uncertainty, but discretionary spending could see a revival in the near term. While there are productivity gains of 10–15% that may be passed on, there are still ample opportunities for redeployment, so the overall revenue pie is not expected to shrink,” he added.

Shibani Kurian, Senior Fund Manager at Kotak AMC, said the recent correction reflects heightened fears around AI’s impact on traditional revenue streams. “The sector has been reacting to recent developments around AI, particularly concerns that it could cannibalize revenue from software implementations like ERP, which form a significant part of IT services revenue. There has been considerable media chatter on this topic,” she said.

In her view, the reaction has swung too far. “AI is a transformative trend that will evolve over time, but it is unlikely to completely erode the revenue pool for IT services players. Market reactions often swing to extremes, and the current narrative that IT services is ‘dead’ is one such overreaction,” he said.

Thomas echoed that sentiment, particularly around fears of disproportionate impact on large players. “Clear signs of concern would include a plateau or decline in deal flow or a significant reduction in headcount, but these have not been observed. Earnings commentary and performance this quarter remain largely in line with expectations, showing marginal sequential improvements,” he said.

Kurian added that while disruption is inevitable, workflows will not disappear. “ERP implementations, for example, still require human-led integration, and although AI may introduce some deflationary pressures, these can often be offset by increased work volume.”

She expects differentiation within the sector. “In this cycle, differentiation will emerge between companies that integrate AI internally to reduce costs and mitigate deflationary impact, and those that offer unique AI solutions to clients, capturing a larger share of the growing AI segment. Deal flow momentum over the past few quarters remains strong, indicating that work is not drying up.”

From a portfolio standpoint, Quantum has not altered its positioning. “The IT sector currently represents about 16% of the Quantum Value Fund, and that position has not changed. The allocation is higher than the sector’s index weight, reflecting our confidence in valuations. There is scope to add more as opportunities arise, particularly since most stocks have declined from their peak valuations,” Thomas said.

Kotak AMC, meanwhile, remains neutral in its stance. “Our approach remains neutral in IT exposure and more stock-specific. We focus on companies with strong vertical demand, such as banking and financial services, and those that demonstrate agility in providing solutions,” Kurian said, adding that they will keep closely monitoring how AI developments unfold.

On an average, as per December 2025 allocation data from MOFSL, fund houses are underweight on the sector (7.9%) against the BSE 200 weight of 8.7 percent. This has increased to around 8% against 9 percent in the index. MF holdings in the Nifty IT Index rose from Rs 3.16 lakh crore in Sep-25 to Rs 3.56 lakh crore in Dec-25.