Shares of IT major Wipro are likely to face heavy selling pressure on Thursday after its American Depository Receipts (ADRs) plunged as much as 17% overnight. The sharp decline reflects growing investor concerns over the company's earnings outlook and the increasing impact of artificial intelligence on the traditional IT services business.
The stock has already lost significant ground over the past few years. Wipro shares are currently trading at Rs 170.35, down 54% from their record high of Rs 369.93 touched on October 14, 2021.
What’s troubling one of India’s largest players?
The pressure on the stock stems from a combination of near-term macroeconomic challenges in North America, the biggest market for Indian IT companies, and longer-term concerns about the disruption caused by generative artificial intelligence.
While companies continue to grapple with delays in client spending, investors are increasingly worried about the sustainability of the industry's long-standing business model. DBS Bank said the impact of AI is becoming most evident in India's large IT services and outsourcing sector, which has historically been a key driver of exports, employment and stock market performance.
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According to the bank, generative AI is rapidly automating coding, customer support and back-office functions, posing a direct challenge to the labour-arbitrage model that has powered India's major IT firms for decades.
The latest selloff also follows Accenture's decision to trim the upper end of its annual revenue growth forecast, reviving concerns over weak discretionary technology spending. The company's outlook reinforced investor fears that enterprises remain cautious on spending related to IT consulting and digital transformation projects, even as investments in artificial intelligence and cybersecurity continue.
The development is particularly significant for Indian IT companies, which generate a large share of their revenue from North America and regularly compete with Accenture for large digital transformation contracts.
At the same time, elevated inflation and tight monetary policy in the United States continue to weigh on enterprise technology spending. A hawkish stance from the U.S. Federal Reserve has intensified concerns that discretionary corporate budgets could remain under pressure for longer. According to the CME FedWatch Tool, traders are pricing in around a 67% probability of a September rate hike and expect three rate increases this year. Since Indian IT companies derive the bulk of their business from corporate capital expenditure in North America, these macroeconomic pressures have a direct impact on their revenue pipeline.
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What’s next?
Looking ahead, JPMorgan expects growth headwinds for the information technology sector to persist over the next two years. The brokerage said the industry faces an uncertain demand environment due to an unprecedented combination of business cycle challenges, geopolitical risks and deflationary pressures arising from generative AI.
JPMorgan downgraded Wipro, HCL Technologies and Tata Technologies to underweight, saying current valuations do not fully reflect the recent correction in share prices.
The brokerage also expects further cuts to FY27 revenue growth estimates for these companies. "With a softer start to the year, the ask rate for FY27 gets tougher, as the usual 1H strength is unlikely to play out this time," JPMorgan analysts said in a client note.
