- Indian IT sector faces a 27% drop in Nifty IT index since December 2024 peak
- Large caps hold cash reserves aiding AI adoption despite legacy system challenges
- Sector trades near 10-year average PE of 21.6x, valuations now attractive post-crash
The Indian IT sector, once the crown jewel of the domestic equity market, is facing what many are calling its "existential moment." Following a brutal February rout triggered by the launch of Anthropic's "Claude Cowork" plugins, the Nifty IT index has plunged nearly 27% from its December 2024 peak.
As billions in market cap evaporate, investors are left asking: Is this the end of the labor-intensive outsourcing model, or a classic "blood in the streets" buying opportunity? Rushabh Desai, founder of Rupee With Rushabh spoke to NDTV Profit to navigate this high-stakes volatility.
Valuations: Below the 10-Year Average?
Despite the gloom, Desai argues that the "extinction" narrative may be overblown. While large-cap giants are grappling with legacy systems, their massive cash reserves provide a significant safety net for AI adoption.
"Indian IT is not going to die. We've survived Y2K, the 2008 crisis, and the 2020 pandemic. Large caps have the capital to pivot, and mid-tier companies are already adopting AI with superior double-digit growth," Desai says.
From a valuation standpoint, the numbers are becoming hard to ignore. As of January 31, the sector was trading at 22x PE, just a hair above its 10-year average of 21.6x. Following the February crash, valuations have likely dipped below long-term averages, making the sector "incredibly attractive" for those with a long-term horizon.
The "50-50" Strategy
For investors sitting on the sidelines, Desai cautions against "going all in" due to the risk of further drawdowns. Instead, he proposes a disciplined 50-50 deployment strategy:
- Immediate Entry: Deploy 50% of your intended capital now to capture current valuations.
- Staggered Entry: Allocate the remaining 50% over the next few months to hedge against potential further corrections.
While the historical data is tempting-the IT index has delivered a 15.5% CAGR since 2004-Desai warns that sectoral funds are not for the faint-hearted. "These funds are for investors who understand cyclicality. We've seen 55% drawdowns in 2008 and 33% in 2020," he warns.
For the average retail investor, Desai recommends capping IT exposure at 5% to 7% of the total portfolio, preferably through active or passive mutual funds rather than individual stock picking.
The "Anthropic Effect"
The catalyst for the current carnage was the January 30 rollout of 11 AI plugins by Anthropic. These tools, capable of automating complex workflows like legal contract reviews and data analysis, strike at the heart of the "billable hours" model.
"The market sentiment is incredibly weak," Desai notes, pointing to a massive Rs 1,830 crore outflow from Foreign Institutional Investors (FIIs) in the sector. The index's recent 8% weekly drop-a fall sharper than the initial COVID-19 shock-reflects a deep-seated fear that traditional IT services are becoming redundant.
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