Nifty IT falls 4% on poor Q4 earnings as ‘AI deflation’ weighs on industry

HCLTech shares crashed 11% post Q4 results, with comments by the management seen as worrying for the IT industry.

The Nifty IT index fell 3.9% on Wednesday after tepid March quarter earnings and an underwhelming outlook painted by the management of HCL Technologies dragged down shares of the country’s third largest IT services provider by nearly 11% – the most in over a decade – to Rs 1,286.40. This hit sentiment across the IT sector, as investors worried over the prospects of other IT majors due to deal sizes becoming smaller because of cost efficiencies brought in by the use of artificial intelligence (AI).

The fall in the IT index caused the benchmark Nifty index to decline 0.8% to 24,378.10, while the Sensex ended Wednesday 1% lower at 78.516.49. The IT sector has the third-highest weightage on these benchmark indices after banking and financial services and oil and gas.

While the Nifty IT index is up nearly 4.5% in the last one week, it is down 20% from three months ago with fears over loss of business from AI models sparking a slide in stocks in early February following the release of Anthropic’s Claude Cowork agent.

On Tuesday, HCLTech reported a lower-than-expected consolidated net profit of Rs 4,488 crore for the January-March quarter, with the top line down 3.3% from the preview quarter when measured in constant currency terms. For 2025-26 as a whole, HCLTech’s revenue growth was 3.9% in constant currency terms, missing its guidance of 4-4.5%.

The company’s underperformance in Q4 was due to lower discretionary spending by two large US clients in the telecom sector and the discontinuation of select SAP programmes. In 2026-27, HCLTech expects a mere 1-4% growth in its revenue, with client-related issues seen in the March quarter set to play out in the current financial year too.

According to analysts from Motilal Oswal Financial Services, “AI deflation (is) starting to bite the industry”.

“HCLT’s service line is less exposed to GenAI deflation, with ~2–3% drag on its revenues. For the industry, HCLT estimates a higher drag of 3–5%; taken over 4–5 years, this implies 15–20% of revenues at risk – higher than earlier expected, with the risk that AI swallows a larger part of the services stack,” Motilal Oswal said in a note on Wednesday.

AI deflation refers to the reduced cost of providing a service because of efficiencies from artificial intelligence. As a result, the size of deals also reduces, leading to an impact on revenues.

Following HCL Tech’s quarterly results and the cautious commentary by its management, other IT majors such as Infosys, Tech Mahindra, and TCS fell 2-3%. Persistent Systems declined 5% after reporting soft quarterly results.

The AI deflation factor seemingly adds to concerns for the IT industry, which was already under pressure from new AI models from the likes of Anthropic. Nomura has reduced its target price for HCLTech to Rs 1,600 from Rs 1,700, calling the fourth quarter results an “all-round miss”.

According to Motilal Oswal, while some clarity is required on how the AI deflation and client-specific issues play out in the near term, HCLTech remains more resilient than some of its “application-heavy peers” to the changes being faced by the industry thanks to its exposure to engineering research and development, chip design, and infrastructure management. “HCLTech continues to position itself as an ‘AI solutions company’,” YES Securities added.

The Nifty IT index fell 3.9% on Wednesday after tepid March quarter earnings and an underwhelming outlook painted by the management of HCL Technologies dragged down shares of the country’s third largest IT services provider by nearly 11% – the most in over a decade – to Rs 1,286.40. This hit sentiment across the IT sector, as investors worried over the prospects of other IT majors due to deal sizes becoming smaller because of cost efficiencies brought in by the use of artificial intelligence (AI).

The fall in the IT index caused the benchmark Nifty index to decline 0.8% to 24,378.10, while the Sensex ended Wednesday 1% lower at 78.516.49. The IT sector has the third-highest weightage on these benchmark indices after banking and financial services and oil and gas.

While the Nifty IT index is up nearly 4.5% in the last one week, it is down 20% from three months ago with fears over loss of business from AI models sparking a slide in stocks in early February following the release of Anthropic’s Claude Cowork agent.

On Tuesday, HCLTech reported a lower-than-expected consolidated net profit of Rs 4,488 crore for the January-March quarter, with the top line down 3.3% from the preview quarter when measured in constant currency terms. For 2025-26 as a whole, HCLTech’s revenue growth was 3.9% in constant currency terms, missing its guidance of 4-4.5%.

The company’s underperformance in Q4 was due to lower discretionary spending by two large US clients in the telecom sector and the discontinuation of select SAP programmes. In 2026-27, HCLTech expects a mere 1-4% growth in its revenue, with client-related issues seen in the March quarter set to play out in the current financial year too.

According to analysts from Motilal Oswal Financial Services, “AI deflation (is) starting to bite the industry”.

“HCLT’s service line is less exposed to GenAI deflation, with ~2–3% drag on its revenues. For the industry, HCLT estimates a higher drag of 3–5%; taken over 4–5 years, this implies 15–20% of revenues at risk – higher than earlier expected, with the risk that AI swallows a larger part of the services stack,” Motilal Oswal said in a note on Wednesday.

AI deflation refers to the reduced cost of providing a service because of efficiencies from artificial intelligence. As a result, the size of deals also reduces, leading to an impact on revenues.

Following HCL Tech’s quarterly results and the cautious commentary by its management, other IT majors such as Infosys, Tech Mahindra, and TCS fell 2-3%. Persistent Systems declined 5% after reporting soft quarterly results.

The AI deflation factor seemingly adds to concerns for the IT industry, which was already under pressure from new AI models from the likes of Anthropic. Nomura has reduced its target price for HCLTech to Rs 1,600 from Rs 1,700, calling the fourth quarter results an “all-round miss”.

According to Motilal Oswal, while some clarity is required on how the AI deflation and client-specific issues play out in the near term, HCLTech remains more resilient than some of its “application-heavy peers” to the changes being faced by the industry thanks to its exposure to engineering research and development, chip design, and infrastructure management. “HCLTech continues to position itself as an ‘AI solutions company’,” YES Securities added.