The Indian IT sector, after a prolonged period of uncertainty, is witnessing a notable resurgence in investor confidence. While significant structural challenges persist, a combination of favourable currency movements, stable earnings, and the transformative promise of Artificial Intelligence (AI) has sparked a powerful rally in IT stocks over the last few months.
A Surprising Rally Amidst Persistent Headwinds
It may be premature to declare that the sector's troubles are entirely in the past. Disruption from generative AI, continued demand sluggishness in key Western markets, and concerns over a potential US economic slowdown remain substantial threats. However, market sentiment has turned notably positive. Since October this year, the Nifty IT index has soared by nearly 15%, dramatically outperforming the broader Nifty 50, which managed only a 5% rise in the same period.
This outperformance is even more pronounced in December. As of the 18th of the month, the Nifty 50 was down 1.5%, while the Nifty IT index climbed 3.3%, poised to extend its monthly winning streak to three consecutive months. It is crucial to note the broader context: on a year-to-date basis, the Nifty IT index is still down 9%, contrasting with a 9% gain for the Nifty 50.
Experts point to several factors driving the recent uptick. The weakness of the Indian rupee has provided a tailwind for export-oriented IT firms. Furthermore, stable Q2 earnings and expectations of US Federal Reserve rate cuts have contributed to the sector regaining some lost ground.
Top Performers and Brokerage Upgrades
The rally has been broad-based, with several major players posting impressive gains. Persistent Systems led the pack with a 31% surge since October. It was closely followed by LTIMindtree and HCL Technologies, which jumped 21% and 20%, respectively.
Other significant gainers include Coforge (up 17%), Tech Mahindra (15%), TCS (14%), Infosys (13%), Wipro (10%), and Mphasis (9%). Oracle Financial Services Software (OFSS) was the sole Nifty IT constituent in negative territory, losing nearly 9%.
This performance has caught the attention of analysts. Radhavi Deshpande, Chief Investment Officer at Kotak Mahindra Life Insurance, told Mint that after four years of underperformance, valuations have become reasonable, making select companies attractive. She emphasised a focus on firms actively investing in AI capabilities to capture long-term growth.
Investment Outlook: Is It Time to Bet on IT Again?
Brokerage firm Motilal Oswal Financial Services has presented a compelling case. They noted that while IT services' share in Nifty profits has held steady at 15% for four years, its weight in the benchmark index has plummeted to a decadal low of 10% from a peak of 19% in December 2021. This divergence, they argue, presents an enticing opportunity.
The brokerage has consequently raised its stance on Indian IT services to 'mild-overweight', trimming positions in consumer discretionary and healthcare stocks. They believe the current stock prices already reflect the challenging status quo, leaving room for outsized gains if a recovery materialises.
Motilal Oswal has upgraded its growth estimates for the sector, anticipating a recovery that will begin in the second half of the next financial year (H2FY27) and take full shape in FY28 as enterprises ramp up full-scale AI deployment. Reflecting this optimism, they have upgraded Infosys, Mphasis, and Zensar to 'buy' ratings and moved Wipro to 'neutral'. Their top picks to capitalise on the AI wave are Hexaware and Coforge in the mid-tier segment, and HCL Tech and Tech Mahindra among large-cap stocks.
In summary, the Indian IT sector is at a critical juncture. The recent rally signals growing investor belief in a future driven by AI adoption and cyclical recovery. However, with macro-economic uncertainties lingering, a selective, long-term approach focused on companies with robust AI strategies appears to be the prevailing wisdom among experts.
