FILE PHOTO: Anthropic logo is seen in this illustration taken May 20, 2024. REUTERS/Dado Ruvic/Illustration//File Photo
Feb 5 (Reuters) - Rapid advances in artificial intelligence, triggered in part by Anthropic's latest automation push, could structurally erode the IT sector's high-margin application services revenues, creating downside risks to earnings and valuations, analysts warn.
Shares in India's software exporters settled 0.6% lower on Thursday, a day after plunging 6% in their worst session for nearly six years, as AI-driven automation from U.S.-based Anthropic and Palantir fuelled fears of compressed project timelines and disruption to the industry's labour-intensive business model.
The weakness has echoed across global IT stocks this week, extending a broader selloff in companies seen as most exposed to potential AI disruption.
"There is more pain ahead for Indian IT," Jefferies said, adding that Anthropic's and Palantir's claims highlight how AI could potentially erode application service revenues for IT firms.
"With application services accounting for 40–70% of revenues, firms face growth pressures, and consensus growth estimates do not fully reflect this, posing downside risks to valuations."
DISRUPTION
Indian IT firms have been ramping up AI investments and re-skilling efforts, even as weak global tech spending, delayed client decision-making and pricing pressure have weighed on the sector. Foreign investors offloaded a record $8.5 billion worth of Indian IT stocks in 2025.
However, some analysts said the sharp selloff may be overdone.
JPMorgan said that while concerns around AI disruption were not without merit, it was illogical to extrapolate the launch of some tools to an expectation that companies will replace every layer of mission-critical enterprise software.
Domestic brokerage Kotak Institutional Equities described the decline as a case of "plenty of panic over a little flutter".
Among large IT firms, Tata Consultancy Services, Tech Mahindra and LTIMindtree have higher exposure to application services, which account for about 55%–60% of revenues, while HCL Tech has the lowest exposure at around 40%.
Their stocks fell between 4% and 7% % on Wednesday, and extended losses on Thursday.
Brokerage Motilal Oswal estimates that 9%-12% of industry revenues could be eliminated over the next four years due to AI-led disruption.
Jefferies expects AI to weigh on IT-sector revenue growth over the next one to two years, arguing that deflation in legacy service-line revenues will more than offset gains from AI-related opportunities.
The IT sub-index has lost 17% since the start of 2025, including Wednesday's selloff, and is on track for its worst week in over four months.
(Reporting by Kashish Tandon and Bharath Rajeswaran in Bengaluru; Writing by Chandini Monnappa; Editing by Mark Potter and Louise Heavens)
