The big AI shock: Have Indian IT sector stocks lost their lustre?

Globally technology sector stocks are leading stock market rallies. In India, the picture is the opposite. The Nifty IT index has dropped around 23% since the start of the year, sharply underperforming the broader market decline of around 10%. In fact, ⁠IT has been the worst-performing major sector in the Indian market over the past 12-18 months. In May, 2026, the Nifty IT index touched a near 3-year low, losing more than a fourth of its value since the start of the year.Analysts note that IT has not only underperformed outperforming sectors like metals and pharma, but has also fared worse than most other declining sectors, indicating a sector-specific derating rather than a broad market correction.Quarterly earnings and forward guidance have disappointed with HCLTech guided for just 1-4% revenue growth in FY27, Infosys guided 1.5-3.5%, and Wipro guided Q1 FY27 at -2% to flat. What is causing Indian IT sector stocks to go deep in red? Have IT sector stocks, once the darling of Dalal Street, lost their lustre? And what should investors do?The answer lies in two words: Artificial Intelligence There is growing investor anxiety around AI disruption. Every time any major AI company, whether it is OpenAI, Anthropic, or others, launches a new product or announces a deeper enterprise push, IT stocks take a tumble! Manav Medewala, Research Analyst at Mirae Asset Sharekhan explains: Shashwat Singh, Fundamental Analyst- Bajaj Broking says that most companies are guiding to low single-digit constant currency growth, reflecting continued caution in discretionary IT spending. Demand is increasingly tilting toward AI-led transformation, productivity programs, and vendor consolidation, while traditional discretionary digital spending remains subdued. At present, the sector remains in a relatively evolving phase, particularly with respect to the adoption and monetization of AI capabilities, he tells TOI.“Most companies are still in the early stages of developing AI-led offerings, and a clearly differentiated strategy across the sector is yet to fully emerge. Given the prevailing macroeconomic uncertainties and limited near-term visibility on global technology spending, the IT sector remains to be in a cautious stance,” he adds.In the middle of all this, ⁠Indian IT companies have returned a record Rs. 1.3 lakh crore to shareholders in FY26 through dividends and buybacks, up around 36% from the previous year with combined payout ratio crossed 100% of net profit. Infosys had done a Rs 18,000 crore buyback earlier, and now Wipro has announced a fresh Rs 15,000 crore buyback. What does this mean?According to Sushovon Nayak, Lead IT Research Analyst, Anand Rathi Institutional Equities, on the surface, this is good for shareholders as it provides a cash return cushion even if the stock price remains weak. “However, the higher payout ratio of above 100% means these companies are not finding enough high-return investment opportunities to deploy all their cash internally. However, this reflects the capital-light nature of the IT services business model. For now, we see the elevated payouts as a sensible move to support shareholder returns during a period of slower growth,” he tells TOI.Shashwat Singh, Fundamental Analyst at Bajaj Broking points out that historically, Indian IT companies have been strong cash generators, consistently utilizing surplus reserves to reward shareholders through buybacks and dividends. “While we expect a continued commitment to shareholder returns, however, companies can take this opportunity for investing in building robust AI capabilities, both organically and through targeted inorganic opportunities,” he tells TOI.To Manav Medewala, Research Analyst at Mirae Asset Sharekhan, the surge in buybacks and dividends essentially shows that IT companies are sitting on strong cash flows but facing slower growth in the near term, so they are returning excess capital to shareholders rather than aggressively reinvesting. He also believes that this is a way to support stock prices and signal confidence during a phase of sectoral correction. The trend is global as well, with Cognizant raising its 2026 buyback target to $2 billion, underscoring similar dynamics of cash strength and undervaluation. In simple terms, the sector is rewarding shareholders today while recalibrating for an AI-driven future, making this more of a transition phase than a structural slowdown, he says.Are investors overreacting to the impact of AI on the IT sector? Analysts that TOI spoke to expressed confidence in the IT sector, expecting the sector to adapt to the ongoing artificial intelligence-led disruptions.Manav Medewala of Mirae Asset believes that the IT sector stocks haven’t lost its lustre, it’s going through a necessary reset. “History shows that every major technology shift takes time for companies to adapt, pivot, and rebuild growth engines, and AI is no different. Right now, the sector is in that transition phase, with short-term disruption, slower spending, and business model changes weighing on performance. But the long-term demand for AI, cloud, and digital services remains intact. In simple terms we can say that the story is not broken, it’s just evolving, and the turnaround will take time,” he tells TOI.Sushovon Nayak, Lead IT Research Analyst, Anand Rathi Institutional Equities doesn’t see a permanent damage to the IT growth story.“What the market is pricing in today is fear and uncertainty around AI's impact and not an actual collapse in business. IT companies are still profitable, generating strong free cash flows, winning large deals, and paying record dividends. The question market is grappling with is whether AI will turn out to be a growth multiplier for Indian IT or a deflationary force,” Nayak tells TOI.“In our view, it will likely be both over time, but the net impact for scaled IT players will be positive in the medium-to-long term as they become the integration and deployment layer for enterprise AI adoption globally,” he adds. For Antu Eapen Thomas, Senior Research Analyst, Geojit Investments Limited, the medium- to long-term outlook remains intact, supported by strong client relationships, deep expertise in regulated sectors, and legacy modernization opportunities. Sustaining this position will require continued investment in proprietary AI capabilities to enhance efficiency and drive business transformation, Thomas says.Market experts say that near-term risks to IT sector stocks caused by the churn due to AI is likely to continue. However, they believe that the long-term story is intact, with the current dip in stock prices offering a window for investors with a medium-to-long term horizon to accumulate some IT stocks.Manav Medewala advises that from a portfolio standpoint, this is not a phase to exit IT stocks; it’s more of a hold and gradually accumulate story. “In the short term, expect volatility due to weak demand and AI-led uncertainty, so returns may remain muted. Existing investors are better off holding positions, as the sharp correction has already priced in a large part of the near-term concerns, while fresh investors can look at gradual accumulation instead of lump-sum buying to navigate volatility,” he recommends.“From a stock perspective, investors should stay selective rather than taking a broad-based sector view focusing on large caps like Infosys and Tech Mahindra for stability while keeping an eye on mid-tier names such as Persistent Systems and Coforge for growth opportunities,” he adds.Sushovon Nayak of Anand Rathi Institutional Equities sees near-term pressure in the stocks, though he advocates entry for investors with a 2-3 year horizon. “ The structural demand story for Indian IT --driven by enterprise digital transformation, cloud migration, data modernisation, and now AI deployment remains intact. As AI moves from proof-of-concept to full-scale production, Indian IT companies are well-positioned to emerge as the integration and deployment layer of choice,” he says.“Our suggestion to investors would be to accumulate selectively. Within large-caps, we like Infosys, TechM and LTIM for their scale, deal pipeline, and AI readiness. Among mid-caps, names like Persistent and Mphasis offer stronger niche positioning and growth. Investors should avoid trying to time the exact bottom and instead stagger their purchases during corrections,” he adds.(Disclaimer: Recommendations and views on the stock market, other asset classes or personal finance management tips given by experts are their own. These opinions do not represent the views of The Times of India.)