Dwindling $100-billion-plus stocks

There was a time, not too few years ago, when India’s software and IT reigned supreme, not just in the world but the Indian stock markets. According to media reports, in January 2022, coincidentally a month before the Russia-Ukraine war, TCS was possibly the most expensive stock. With a valuation of just over $200 billion, it was a coveted family jewel, something to be proud of if owned now, if owned sometimes in the past, or if to be owned in the future. If one was, had been, or could be attached to the stock, it was a huge milestone for an investor.

Then, four years later, it hardly mattered. TCS’ stock was battered. The Indian IT illusion had shattered. Indian IT stock universe cratered. Today, the market cap of the Tata-owned IT firm, the largest in the country, is just below $100 billion. A 50 per cent wipeout in dollar terms, and 45 per cent one in rupee terms. One shudders to think of those who purchased the stock in 2022. Obviously, the price-to-earnings multiple has slumped from nearly 40 in early 2022 to 19 now. Other reports indicate that the stock hit its lowest levels since October 2020. 

One cannot blame the Russia-Ukraine war, or the ongoing Iran war for the TCS debacle. This is because although several stocks fell in 2022 and 2023 due to the Ukraine war but many recovered well. The Iran war has subsumed most stocks, but the TCS dismal saga, which started with the Russia-Ukraine war never stopped, and accelerated after the Iran war. In the past month, before the Iran war started, the stock slumped by 17 per cent or more. If you consider year-to-date values, TCS is down by a quarter, against a Nifty decline of eight per cent.

Indeed, the entire IT universe is in a shock, stunned by low valuations. According to a media report, “Other major IT companies have experienced declines. Infosys, HCL Tech, and Wipro shares have dropped between 32 per cent and 44 per cent from their respective peaks. In contrast, the Nifty IT index has decreased by around 35 per cent, while the benchmark Nifty 50 has seen an eight per cent decline. Over the past 12 months, stated another report, 75 Indian IT firms lost more than $100 billion in market cap, which is “higher than the IMF’s 2026 GDP estimate for Venezuela,” and GDP of Sri Lanka (2024).

Of the $100 billion lost in the recent past, TCS was responsible for $40 billion, Infosys $21 billion, and Wipro $10 billion. In effect, the three of the top four Indian IT firms are responsible for more than 70 per cent of the decline. The only optimism that stems out from the top firms is that HCL Tech lost just $6.5 billion, the lowest among the four. But this may be because HCL’s share price is subdued compared to some of the others. It may be due to the more bread-and-butter work that TCS, Infosys, and Wipro are engaged in, compared to HCL Tech.

Although artificial intelligence (AI) seems to be the most crucial factor for the decline of the IT and software stocks, it cannot be responsible for what happened in 2022 and 2023. AI became important in 2023, and has emerged as a sensitive sore point in the past year or so. So, the story of software decline started before the advent of AI, possibly during the Russian war, and because of the declining and clerical nature of the jobs. Indian firms failed to climb up the software value chain despite claims to do so, and could not adjust to the tech disruptions.

“Citrini Research in a note… outlined a scenario in which contract cancellations at TCS, Infosys, and Wipro would accelerate through 2027. Jeffries, on the other hand, slashed its target prices on Indian IT names by up to 33 per cent, saying that AI may structurally change IT business mix towards consulting and implementation, while shrinking managed services. This, it said, would not only increase cyclicality but also require a change in talent, and operating model, thus adding risks,” stated a media report. Heightened fears of revenue deflation due to “recent model releases from frontier AI labs, and the growing use of agent-based workflows,” added the same report.

“Model improvements so far look incremental and broadly in line with our expectations, but the sharp stock move reflects deeper concerns about the long-term relevance and longevity of IT services,” stated a note by Kotak Institutional Equities. According to Jeffries, maintaining the long-term revenue growth trajectory in line with the previous decade is the best-case outcome for the Indian IT firms. The worst-case outcome may be three per cent lower revenue growth over the next five years. PE multiples, stated Jeffries, may be 14-22 times for the large IT firms, and 23-42 times for the mid-sized ones in the new re-rating formula.

However, HSBC Global Research sees several positives. The top global clients of the Indian IT firms have reported strong earnings, which may lead to long-term spending. There may be a pause due to rapidly-evolving AI models, and uncertainty around the adoption curve. Over time, business outlook and higher productive gains among the clients will drive “incremental investment” in software. “On a net basis, these (productivity gains in clients’ businesses) should offset AI deflation, and may still lead to mid-single-digit growth for some IT companies.”

ICICI Securities offers hope too. It feels that valuations have turned more supportive after years of corrections. The stocks now trade closer to the long-term historical averages, after the massive declines and, hence, the risk-reward scenario is more in tune with the wishes of the long-term investors. “Large caps (IT stocks) offer stability… (and) select midcaps provide above-industry growth potential,” it stated in a recent note. Other brokerage houses feel that the worst is possible behind Indian IT. These positive trends may lead to “better convergence of deals to revenue in the next few quarters.”

Although IT seems to be one of the worst affected sectors due to geopolitics and other disruptions, the recent Iran war has “reshaped India’s $100 billion market cap club.

TCS (as mentioned earlier) and ICICI Bank have fallen below this threshold (maybe temporarily), leaving Reliance Industries, HDFC Bank, Bharti Airtel, and State Bank as the only companies remaining in the $100-billion-plus league,” stated a media report. Although the $100-billion-plus club does not have any significance in a falling market, the deep declines in some stocks, and that too consistently over years, is a matter of concern.