Indian IT Stocks Reflect AI Disruption Risks, Says ICICI Prudential Expert

Chintan Haria, principal for investment strategy at ICICI Prudential Asset Management Company, has stated that the current valuations of Indian IT stocks already account for much of the risk posed by artificial intelligence (AI) to the traditional IT services sector. The Nifty IT index has seen a decline of roughly 25% in 2026, causing its price-to-earnings (P/E) ratio to fall below that of the broader Nifty 50 index.

Haria observes that this correction likely represents a valuation reset where the market has factored in the challenges AI introduces to established IT business models. He points out that investors should now concentrate on companies capable of adapting to AI-driven changes and capitalizing on emerging opportunities in areas like data engineering, cloud migration, legacy system modernization, and AI integration.

During a recent discussion, Haria explained that while AI threatens certain traditional IT service segments, particularly those involving manpower-heavy or routine maintenance tasks, the steep valuation decline of the sector suggests that much of this risk is already reflected in current stock prices. Currently, the Nifty IT index trades at around 17.6 times earnings compared with 19.2 times for the Nifty 50, indicating a market expectation of subdued growth in traditional IT services.

Initially, there was concern that AI would displace Indian IT service providers by automating tasks they traditionally perform. However, Haria notes that AI adoption is not solely about replacing existing services but also about creating new technology demands. Enterprises looking to implement AI need to organize their data effectively, upgrade legacy systems, migrate workloads to the cloud, and integrate AI into their operational workflows. Indian IT firms, with their large scale, delivery expertise, and strong client relationships, are positioned to support these transitions and benefit from the new technology spending cycle.

Regarding whether AI-related spending will add to or cannibalize traditional IT budgets, Haria suggests it will be a mix. Some AI investments will replace existing services, potentially reducing revenues in those areas. Yet, AI adoption also requires fresh investments in infrastructure and consulting, which could ultimately expand overall technology spending. The critical factor will be whether growth from new AI-driven projects outpaces declines in legacy services.

Haria identified data engineering, legacy modernization, cloud migration, and AI integration as particularly promising segments within the AI value chain for Indian IT companies. He emphasized that enterprises cannot effectively deploy AI solutions without solid foundations in these areas, making them key growth drivers.

He also advised investors to carefully evaluate IT companies’ actual progress in AI capabilities. Indicators such as client adoption rates, revenues from AI-related services, productivity gains, and ongoing investments in AI skill development and technology will help distinguish firms that are genuinely positioning themselves for AI-led growth from those merely using AI as a buzzword to justify valuations.

At current valuations, Haria believes the sector prices in a scenario of subdued growth and a normal recovery in discretionary technology spending. Large-cap IT companies with strong cash balances appear attractive, as any positive shift in the global AI narrative could significantly boost their market value.

While the Nifty IT exchange-traded fund (ETF) offers broad sector exposure, Haria acknowledged that its concentration in established legacy IT firms might limit direct participation in some newer technology themes linked to AI. Nonetheless, he expressed confidence that the sector’s scale and adaptability will enable it to capture emerging opportunities over time.

For investors with a five-year horizon, the recent market correction provides a more appealing entry point into Indian IT stocks. However, Haria cautioned that selective stock picking is essential. Risks that could undermine the optimistic AI-led growth outlook include faster-than-expected erosion of traditional service revenues, pricing pressures, slower technology spending globally, and weaker-than-anticipated returns from AI investments.

Those companies that successfully navigate these challenges and embrace AI-driven transformation stand to participate meaningfully in the next wave of technology spending. The Indian IT sector, with its long history of adapting to change, may continue to be a vital player in the evolving global technology landscape.

Disclaimer: This article was written by Nikhil Agarwal, who is not a SEBI-registered Research Analyst or Investment Adviser. He and his relatives do not hold financial interests in the companies mentioned as of the publication date. The views presented are attributed to the respective SEBI-registered analysts or brokerages and should not be interpreted as endorsements by The Economic Times Digital or the author. Readers are encouraged to consult original research reports and make independent investment decisions.