It could be too early to say that the worst is behind for the Indian IT sector, as disruption led by the emergence of artificial intelligence (AI), demand sluggishness in key western markets, and concerns over economic slowdown in the US remain key threats for the sector. Nevertheless, the sector has seen significant investor interest over the last few months. Since October this year, the Nifty IT index has jumped nearly 15% compared to a just 5% rise in equity benchmark Nifty 50.
On a monthly scale, the Nifty 50 index is down 1.5% in December till the 18th, while Nifty IT is up 3.3%, looking set to extend its monthly winning streak to the third consecutive month.
Year-to-date, however, the Nifty IT index is down 9%, compared to a 9% gain in the Nifty 50 index.
Experts say the weakness of the Indian rupee has helped the Indian IT sector to some extent lately. Export-oriented sectors tend to gain when the domestic currency weakens. Moreover, stable Q2 earnings and US Fed rate cuts, too, have helped the IT stocks gain some ground.
These Nifty IT stocks hog the limelight
Shares of Persistent Systems have surged 31% since October, followed by LTIMindtree and HCL Technologies, which have jumped 21% and 20%, respectively, for the same period.
Coforge (up 17%), Tech Mahindra (up 15%), TCS (up 14%), Infosys (up 13%), Wipro (up 10%) and Mphasis (up 9%) have also clocked healthy gains since October. In fact, Oracle Financial Services Software (OFSS) is the only Nifty IT stock that has been in the red, losing nearly 9%, for the period.
Should you bet on IT stocks?
Some experts see value emerging in a few IT stocks, as after four years of underperformance, valuations have come lower.
“After four years of underperformance, valuations have become reasonable, making some companies in this sector attractive. We believe investors should focus on companies actively investing in AI capabilities to capture emerging opportunities and position themselves for long-term growth,” Radhavi Deshpande, Chief Investment Officer for Kotak Mahindra Life Insurance, told Mint.
Brokerage firm Motilal Oswal Financial Services noted that IT services’ share in Nifty profits has been stable at 15% for the past four years, whereas its weight in the benchmark index is now at a decadal low of 10% compared to 19% peak in December 2021.
The brokerage firm believes this presents an enticing opportunity.
“We raise Indian IT services to mild-overweight by trimming our position in consumer discretionary and healthcare names,” said Motilal Oswal.
“Our analysis suggests outsized gains if this plays out, whereas the current levels already bake in the status quo (GenAI-led deflation, demand apathy),” the brokerage firm said.
Motilal Oswal has upgraded its growth estimates for the sector to factor in a growth recovery, which it believes will start reflecting in the second half of the next financial year (H2FY27), taking full shape in FY28 as enterprises enter full-scale AI deployment.
Motilal has upgraded Infosys to a ‘buy’ from a ‘neutral’. It has also upgraded Mphasis and Zensar to a ‘buy’, and upgraded Wipro to a ‘neutral’.
Its top picks to play the next AI wave are Hexaware and Coforge in mid-tier and HCL Tech and Tech Mahindra in large-cap.
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Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
