IT stocks recover: JPMorgan analyst remains cautious, Macquarie says AI disruption worries are overdone

IT stocks recover

• Indian IT stocks drop for fourth session over AI concerns
• Brokerages divided on IT outlook: JP Morgan cautious, Macquarie positive
• IT stock drop seen as fear-driven, not based on fundamentals

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The shares of Indian IT companies have seen strong volatility recently, as worries around artificial intelligence-led disruption weighed on the near-term outlook. Analysts from two international brokerages remain divergent on their views about the sector, with one remaining cautious, while the other optimistic.

The fall in heavyweights like Infosys, Tech Mahindra and more pushed the Nifty IT index down more than 1 percent earlier during the day. However, the index then made strong recovery, snapping a three-session losing streak to close in the green at 32,799.90. This came as mid-cap IT stocks like Coforge and Persistent Systems gained up to 3 percent.

Why IT stocks have been volatile recently?

The sharp decline in IT stocks began earlier this month amid concerns that artificial intelligence can intensify competition after Anthropic's launch of a legal AI tool. Investors remained concerned that AI was creating more competition for software makers, after Anthropic’s launch of a legal tool for its Claude AI chatbot.

Vaqarjaved Khan, Senior Fundamental Analyst at Angel One, said that the weak sentiment was amplified by global tech sector weakness and rupee depreciation, exacerbating FPI outflows.

US job growth unexpectedly increased in January and the unemployment rate fell to 4.3 percent. These signs of labor market stability could give the Federal Reserve room to keep interest rates unchanged for some time while policymakers monitor inflation.

However, the sharp increase in payrolls was seen in the health sector. According to economists quoted by Reuters, job openings and other indicators pointed to a tepid labor market, adding that job growth remained concentrated in the healthcare and social services industries, which accounted for nearly all the rise in employment.

"The only jobs being filled in January are in health care and social assistance, along with some nonresidential specialty trade contractors probably related to AI facilities, all of which do not guarantee the economy's future success," the report quoted Christopher Rupkey, chief economist at FWDBONDS, as saying. "If you are looking for a job ... you are unlikely to find anything to apply for in today's report,” he added.

JPMorgan on IT:

JPMorgan Head of Asia & Co-Head of Global Emerging Markets Equity Strategy, Rajiv Batra, noted that markets will side towards those IT companies who show the ability to adapt to such disruptive technologies at a cheaper rate than the global peers.

While speaking to CNBC-TV18, the analyst said that valuations still seem high in comparison to earnings, hence investors must look at growth prospects. He added that he sees "substantial downside" to IT stocks from here.

In an earlier note titled 'India IT Services: Looking through the AI fog', JPMorgan's Asian Pacific Equity Research team argued that artificial intelligence will create new areas of work, instead of simply shrinking the opportunities for IT vendors.

"IT firms remain the plumbers of the technology world…However, it's overly simplistic to assume that AI can automatically generate enterprise grade software and replace the value IT Services firms create across the cycle," it added.

Macquarie on IT:

Ravi Menon, Lead Analyst at Macquarie Group, meanwhile said that people underestimate the demand elasticity in technology. He said that AI won't change much as the cost of coding has always been dropping.

"Back in 2012-13, when the 'Low code no code' tools started emerging, this was a concern. But that actually became the fastest growing practices for Indian IT services firms over the time. So I don't think the new AI tools are any cause of concern for people. Firms should adapt to these tools, and change the business model a little to price a lot more on the outcome," he said while speaking to CNBC-TV18.

He added that the latest AI inventions don’t seem to be anything that is significantly disruptive. The recent fall in IT stocks is led by fear more than fundamentals, and the disruption worries are likely overdone, he further said.

According to Menon, this is the phase where investors should start buying fairly aggressively. However, he said that some of the large-caps may see 10 percent downside in the worst-case scenario. He added that demand trends are improving, and guidance in April could trigger a PE rerating in IT stocks.

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