Domestic brokerage firm Anand Rathi believes Indian IT companies could emerge as beneficiaries of the rising capital expenditure burden on global technology giants, as investors increasingly favour asset-light businesses with strong free cash flow (FCF) generation. The brokerage sees attractive risk-reward opportunities in Indian IT stocks, with Tech Mahindra, LTIMindtree, and Mphasis among its top picks.
In its latest report, the brokerage said the AI infrastructure buildout was becoming increasingly capital-intensive amid accelerating demand. While concerns initially centred on leveraged AI infrastructure providers such as CoreWeave, with its credit default swap (CDS) spreads rising to around 1,100 basis points against a one-year average of approximately 670 basis points, financial pressures are now becoming relevant for hyperscalers as well.
The brokerage highlighted that Microsoft was the only major hyperscaler to report positive free cash flow in Q3CY26, while its peers continued to face pressure. However, AWS, Azure, and Google Cloud recorded year-on-year growth of around 39%, 48%, and 103%, respectively, with aggregate cloud backlogs exceeding $1.8 trillion.
According to Anand Rathi, this divergence highlights robust AI demand, even as converting growth into sustainable cash returns remains challenging.
Rising AI capex strengthens the case for Indian IT stocks
Anand Rathi estimates that combined capital expenditure by hyperscalers will approach $730 billion in CY26, representing growth of more than 80% year-on-year, with further increases expected in CY27. The brokerage believes rising financial obligations, dependence on external financing, and concerns over returns on invested capital could make funding discipline increasingly important.
Against this backdrop, the brokerage expects capital to rotate towards asset-light companies with strong cash generation, particularly Indian IT services firms. It noted that the top six Indian IT companies are trading at 16 times and 15 times their estimated FY28 and FY29 earnings, respectively, compared with their 15-year average one-year forward price-to-earnings multiple of 17.9 times.
The stocks also offer free cash flow yields of 6.5% and 7.2%, alongside dividend yields of 5% and 5.4%, respectively. However, Anand Rathi cautioned that services revenue growth remains in the low single digits, while AI-led pricing deflation could constrain growth and margins. Therefore, the investment case rests on the quality of cash generation rather than an immediate acceleration in growth.
The brokerage also highlighted contrasting trends in global IT services, with Capgemini upgrading its guidance on broadening AI-led transformation demand, while Cognizant’s downgrade, despite strong BFSI growth, reflected persistent discretionary spending weakness. It added that Indian IT companies with diversified businesses, strong cash conversion, and AI capabilities offer attractive opportunities as AI monetisation scales.
Tech Mahindra, LTIMindtree and Mphasis are top picks
Among Indian IT companies, Anand Rathi prefers Tech Mahindra, LTIMindtree, and Mphasis, citing their growth prospects, deal momentum, and AI capabilities.
For Tech Mahindra, the brokerage believes the margin-repair phase under CEO Mohit Joshi is largely complete, with the company’s focus shifting towards growth. Large-deal ramp-ups, accelerating telecom demand, and strong deal wins are expected to support the outlook. The company recorded around $4.3 billion in last-twelve-month net new total contract value, marking a 35% year-on-year increase.
For LTM, Anand Rathi highlighted its strong large-deal execution under CEO Venu Lambu, improving BFSI momentum and AI monetisation opportunities. The Randstad acquisition is also expected to provide incremental growth, greater European diversification, and potential synergies.
Meanwhile, Mphasis’ relatively high BFSI exposure, accounting for around 68% of its business mix, positions it to benefit from sustained technology spending by US banks. The brokerage believes strong deal momentum and AI-led platform capabilities could further support growth acceleration.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
