TCS, HCL Tech, Infosys shares surge up to 11% in 2 days; Nifty IT soars 2,000 points. More steam left for rally?

ETMarkets.com

Indian IT stocks rallied as concerns over AI-driven disruption eased, triggering an “anti-AI” trade.

Nifty IT index has soared more than 2,000 points over just two sessions to cross 30,000 on Wednesday, marking the first time in nearly a month. This came as heavyweight HCL Tech shares soared nearly 11% in two days since its Q2 results, while TCS and Infosys rallied 6-10% during the same period.

The IT story: ‘Anti-AI trade’

The recent rally in IT stocks comes after a sharp sell-off this year, driven by multiple headwinds, with the AI frenzy being the most prominent. As hyperscalers continued to increase spending on the nascent technology, doomsday prophets began to sound the alarm for Indian IT companies, believing that the new innovations could lead to displacement in the sector. "We call it the ‘SaaSpocalypse,’ an apocalypse for software-as-a-service stocks," Bloomberg quoted Jeffrey Favuzza from the equity trading desk at Jefferies as saying.

However, some analysts soon began to question the excessive optimism around AI, with some screaming bubble burst like crisis ahead amid the massive spending behind AI infrastructure. Michael Burry, popular for correctly predicting the 2008 housing crisis, has been ramping up his warnings over the excessive optimism over AI. Recently, he said that the market is currently in a 'denial' mood, a phase that could last six to nine months as seen during the previous 2000 and 2008 crises.

Also read | Michael Burry screams big market crash ahead! Why legendary investor Peter Lynch ignored such predictions

AI investors or casino gamblers?

While global AI stocks spiralled down as a result of the growing worries, Indian IT stocks began to soar as a result of their ‘anti-AI’ advantage. The latest two-day rally in the IT stocks was boosted after Broadcom CEO Hock Tan said many AI investors are behaving like casino gamblers, betting on something they have very little understanding of. “A lot of investors have no clue what they are investing in. They set very extreme expectations only to find out that it’s almost like they are in a casino,” Tan said during an event in Singapore.

The head of Broadcom, which designs some of the components integral to the global data center buildout, also criticized businesses which were wasting money on AI initiatives and questioned the longer-term economics of money-losing AI labs. Tan said that ChatGPT-maker OpenAI reaching annualized revenue of $50 billion in September points to a viable business model but offers little guarantee on the company’s long-term profitability.

Also read | AI investors or casino gamblers? What Broadcom CEO Hock Tan said that sparked sharp global AI selloff

What lies ahead for IT stocks?

HCLTech’s strong profit growth, higher AI revenue and improved growth guidance lifted sentiment across the IT sector, supporting a broad-based recovery despite weakness in global AI-related stocks, said Siddhartha Khemka, Head of Research, Wealth Management at Motilal Oswal Financial Services. This comes after HCL Tech’s Q2 earnings print impressed market, with the IT major reporting 21% year-on-year (YoY) growth in consolidated net profit to Rs 5,132 crore for the second quarter of FY27.

Axis Securities however remains cautiously optimistic about the IT services sector. "For the Indian IT sector, the pace of global AI adoption over the next 2-3 years remains a key concern for earnings growth and valuations. However, if questions arise globally around the commercial viability of AI, potentially slowing its rollout, market concerns over Indian IT companies could ease," said Krishna Sanghavi, CIO Equity, Mahindra Manulife Mutual Fund.

Also read | Nifty IT surges 5.2% to log biggest single-day gain in 17 months

"The sector may remain positive in the near term, supported by improving sentiment and buying interest following HCLTech's results, but after a sharp rally, some profit-booking and volatility cannot be ruled out," said Gaurav Garg, head of research at Lemonn Market desk.