Market veteran Vikas Khemani of Carnelian Asset Management & Advisors has urged investors not to write off the IT sector despite significant challenges in 2025, arguing that concerns around AI-led disruption are overstated and the sector retains strong long-term potential.

Record Outflows Hit IT Sector Hard

The IT services sector faced unprecedented pressure in 2025, bearing the brunt of record foreign institutional investor (FII) selling. The sector's performance metrics paint a challenging picture:

The massive outflows from IT services represented a significant portion of the overall foreign selling, making it the biggest drag on the sector's performance during the year.

Historical Resilience Through Technology Transitions

Khemani emphasizes that Indian IT companies have successfully navigated multiple technology transitions throughout their history. Speaking to ET Now, he highlighted the sector's track record of adaptation and growth during major technological shifts.

"Every IT company will need to reorient itself, but that has been the case with every technology transition—whether it was Y2K, ERP, digitisation or cloud migration," Khemani explained. "Each time, Indian IT services have expanded both in scope and in addressable market, and I believe this time is no different."

AI Implementation Requires IT Services Expertise

Contrary to fears that AI will displace IT services, Khemani argues that enterprise AI implementation will actually increase demand for IT services companies. The AI transition presents multiple opportunities for IT firms:

• Data organisation and management
• System enablement and integration
• AI tool selection and evaluation
• Deployment and implementation services
• Ongoing maintenance and optimization

The market veteran noted that order books across IT companies have remained resilient, with deal wins continuing to show strength despite broader market concerns.

Selective Approach and Long-term Outlook

While maintaining optimism about the sector's prospects, Khemani acknowledges that performance will vary across companies. "That does not mean every IT company will perform equally well—each transition creates new leaders, and stock selection becomes critical," he stated.

His investment philosophy remains focused on identifying companies with sustainable growth potential: "If we see a sustainable 15–20% earnings growth over the next three to five years at a reasonable price, we are happy to buy and stay invested. Short-term underperformance does not bother us if the long-term story is intact."

Expected Improvement in Market Conditions

Looking ahead to 2026, Khemani expects several factors to support market recovery. He anticipates improved FII flows as US interest rates decline and emerging markets regain attractiveness. The resilience shown by Indian markets despite persistent FII outflows demonstrates underlying strength, and any reversal in foreign flows could lead to significant positive impact and potential market rerating.

Khemani concluded that writing off the IT sector entirely would be a mistake, maintaining his positive stance on select stocks within the space and viewing IT services as a sector with substantial long-term potential.

The Indian stock market's benchmark Nifty index has delivered a modest 6% return over the past year, underperforming its global counterparts. This lackluster performance can be largely attributed to the significant weakness in the Information Technology (IT) sector, which accounts for nearly 10% of the Nifty's weight.

IT Sector Drag

The IT sector witnessed substantial declines across major companies:

These declines have had a considerable impact on the overall index performance, given the sector's significant weight in the Nifty.

Other Sectoral Performances

The power sector also showed weakness:

Tata Motors emerged as the worst-performing Nifty stock, with a substantial 49% decline.

Bright Spots

Despite the overall subdued performance, some sectors provided support to the index:

1. Financial Sector:

   • Bajaj Finance: 48.00% returns
   • SBI Life Insurance: 28.00% returns
   • HDFC Bank and ICICI Bank: 12.00% returns each

2. Other Notable Performers:

   • Reliance Industries: 17.00% returns

Market Outlook

Market experts maintain a constructive outlook for the Nifty, anticipating potential trading within a 5-7% range. They suggest that most negative factors may already be priced into the market and expect a selective recovery in the IT and energy sectors.

Infosys: Recognition in Cloud Services

Despite the overall slump in the IT sector, Infosys has shown resilience in its cloud services division. According to a recent press release, Infosys has been positioned as a Leader in the Gartner® Magic Quadrant™ for Public Cloud IT Transformation Services for the third consecutive year.

This recognition highlights Infosys' excellence in driving cloud and AI innovation through its Infosys Cobalt platform. The company's consistent performance in delivering transformational outcomes through cloud-native professional and managed services underscores its strategic investments in cloud innovation and enterprise automation.

Anant Adya, EVP and Service Offering Head at Infosys, stated, "Being recognized as a Leader in the Gartner Magic Quadrant for Public Cloud IT Transformation Services for the third consecutive year strongly reaffirms the trust our clients place in Infosys."

As the IT sector faces challenges, Infosys' strong position in cloud services could potentially help the company navigate the current market downturn and position itself for future growth.