IT Sector at the Crossroads
The Indian IT sector has faced one of its toughest phases in recent years, dragged down by a slowdown in US demand, recession fears, tariff concerns, and uncertainty over US Federal Reserve rate cuts. Heavy foreign investor selling has added pressure, with the sector underperforming the broader Nifty 50 index in 2025.
Market leaders like TCS and Infosys have slipped over 20% from their 52-week highs, while foreign investors pulled out nearly $2.3 billion from IT stocks in July alone. With sentiment battered, the key question is whether Indian IT has already seen its worst phase — or if a comeback is around the corner.
Signs of a Turnaround?
Market experts suggest that once foreign flows return, IT could re-emerge as a strong allocation pocket. Brokerages believe that potential US Fed rate cuts may act as a trigger for a rebound.
Some fund managers are even calling IT the “new defensive”, as investors rotate away from expensive FMCG stocks into attractively valued IT names that offer competitive returns.
Brokerages Turn Optimistic
Investec View
- Risk-reward has meaningfully improved.
- Expects 10–15% returns over the next year from Tier-I IT.
- Upgraded Infosys to a Buy.
- Prefers Tech Mahindra and TCS among largecaps.
- Mphasis, Zensar, and KPIT Tech are top midcap picks.
JPMorgan View
- AI could shave 2–3% from annual IT growth in the near term, but this may be temporary.
- Tech deflation cycles usually last only 2–3 years, and we may already be in year two.
- Enterprises will still need IT partners to make AI business-ready.
- Current valuations for Tier-I firms like TCS and Infosys are at decadal-low cash flow yields, making the sector attractive.
Where to Look – Large, Mid or Small?
Not all experts agree on where the best opportunities lie.
- Largecaps: Expected growth of 5–10% over the next year.
- Midcaps: Potential 10–12% growth.
- Smallcaps: Could deliver 20–25% gains, thanks to fragmented AI-era deals worth $1–2 million that smaller firms are better positioned to capture.
Fund managers argue that smaller companies may emerge as the biggest winners in this evolving IT landscape.
Skepticism Remains
Despite optimism, not everyone is convinced of a quick turnaround.
- Some analysts warn that earnings revival is still missing, and recovery may take “many quarters.”
- Muted guidance from IT companies continues to worry investors.
- Risks from a prolonged US tariff war and sticky inflation could weigh on global demand.
The Big Question
Once the pandemic-era market darling, Indian IT is now in a rebuilding phase. Valuations, dividends, and long-term demand drivers offer comfort — but questions around earnings visibility and global macro headwinds remain.
Whether Indian IT stocks are on the verge of a sustainable comeback, or still stuck in uncertainty, will largely depend on global flows, Fed policy, and the sector’s ability to adapt to the AI-driven transformation.
