AI may not be India's IT killer after all. Here's why sector could emerge a winner

Morgan Stanley has said AI fears may have led investors to misread India's IT sector. It said Indian IT firms could gain as companies deploy AI across their operations.

In Short

• Morgan Stanley sees Indian IT as a dark horse in AI revolution
• AI fears hit semiconductor markets; Indian IT stocks rebound
• AI may boost demand for Indian IT services, not reduce it

Just days after artificial intelligence (AI)-linked markets such as South Korea and Taiwan grabbed investor attention, global brokerage Morgan Stanley believes India's IT sector could quietly emerge as one of the biggest winners from the AI revolution.

The report comes at an interesting time. AI optimism had helped semiconductor-heavy markets like South Korea and Taiwan outperform India earlier this year. But recent concerns over AI infrastructure spending triggered a sharp selloff in those markets, while Indian IT stocks staged a strong rebound after suffering one of their worst corrections in years.

Against that backdrop, Morgan Stanley says investors may be underestimating India's role in the next phase of the AI boom.

The brokerage describes Indian IT services as a potential "dark horse", arguing that while AI has hurt valuations and created near-term uncertainty, it could eventually become a major growth driver for the sector.

WHY IS MORGAN STANLEY POSITIVE ON INDIAN IT?

For months, investors have worried that generative AI could automate coding, reduce outsourcing demand and hurt India's multi-billion-dollar IT services industry.

Morgan Stanley believes the market may be looking at the story the wrong way.

Instead of replacing Indian IT companies, AI is likely to create demand for the very services these firms specialise in.

As companies around the world move from experimenting with AI to deploying it across their businesses, they will need partners to build AI applications, integrate them into existing systems and manage implementation at scale.

Morgan Stanley says Indian IT companies are well positioned to play that role.

"IT services may prove the dark horse as the world turns to these firms to build AI applications and solutions," the brokerage said in its latest India Equity Strategy Playbook.

WHY HAVE IT STOCKS BEEN UNDER PRESSURE?

Indian IT has been one of the weakest-performing sectors over the past year.

According to Morgan Stanley, technology stocks have fallen about 33% over the last 12 months and are down 6% so far this year as investors worried that AI could fundamentally disrupt the traditional outsourcing business model.

Those fears intensified this week after AI-linked stocks across Asia came under pressure, led by South Korean chipmakers and Taiwan's semiconductor companies, amid concerns that technology companies may have overbuilt AI infrastructure.

However, Indian IT stocks bucked that trend.

The Nifty IT index rebounded sharply after a four-session losing streak, suggesting investors are beginning to differentiate between companies building AI hardware and those expected to benefit from AI adoption through software and services.

AI MAY HURT VALUATIONS, NOT EARNINGS

Morgan Stanley believes the market's concerns are reflected more in stock prices than in business fundamentals.

While acknowledging that AI has weighed on valuations and that slower US economic growth remains a risk, the brokerage expects Indian IT companies to post earnings growth of 12% in FY27 and 8% in FY28.

According to the report, the sector's current challenges are more cyclical than structural.

WHAT DOES THIS MEAN FOR INDIA?

Morgan Stanley also pushed back against the view that AI poses a long-term threat to India's economy.

The brokerage said artificial intelligence may slow India's services export momentum in the near term, but over time it could significantly improve labour productivity from its current low base.

Its broader view is that markets are underestimating India's ability to benefit from the next wave of global AI spending.

As enterprises shift from testing AI tools to deploying them at scale, Indian IT companies could increasingly become the implementation and integration partners that help businesses adopt artificial intelligence.

If that plays out, the sector that investors feared AI would disrupt could ultimately become one of its biggest beneficiaries.

- Ends