Domestic fund managers are gradually raising their stakes, cutting down their underweight positions.
Indian IT stocks are quietly staging a comeback, even as concerns over AI-driven disruption and slower order wins keep investors split on their prospects. Over the past one-month, three-month, and one-year periods, the Nifty IT index has consistently been among the top-performing indices. Domestic fund managers are gradually raising their stakes, cutting down their underweight positions.
According to Elara Capital, IT remains the second most underweight sector, with a position of -0.9 percent as a percentage of market capitalisation and -1.7 percent of assets under management (AUM). With only 30 percent of the top Asset Management Companies (AMCs) currently overweight on IT, analysts see significant headroom for buying by domestic funds.
Here’s a closer look at the fundamental factors driving the bullish narrative:
Tech spends and dollar strength
The strengthening dollar bodes well for the profitability of Indian IT firms, all else being equal. Additionally, expectations around Donald Trump’s potential tax policy—specifically, corporate tax cuts—are fuelling optimism that companies will increase IT spending, benefiting Indian service providers.
Also read: We are cautiously optimistic on IT sector but structural headwinds remain: CLSA’s Sumeet Jain
Adapting to change
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While immigration and visa-related risks continue to pose challenges, Indian IT firms have proven resilient in adapting to evolving US policies. “Indian IT firms have managed to adapt to the imperative of US-based clients having to hire locally,” said Atul Thakkar, Director – Investment Banking, Anand Rathi Advisors.
A report from Motilal Oswal noted that during Trump’s first term, Indian IT companies fundamentally adjusted their hiring strategies, boosting on-shore recruitment despite higher visa rejection rates. “The top five Indian IT services companies posted an average revenue growth of 7.5 percent during 2016-20 under Trump’s presidency,” the report added. Analysts believe Trump’s policies this time are likely to be more business-friendly compared to the outgoing administration.
Attractive valuations
Earlier this year, valuation corrections created buying opportunities. “Even after the recent rise, the IT sector is neither too expensive nor too cheap,” said Thakkar. Companies that have comparable quality of business with potential to earn high return on equity (ROE) are highly priced. The Nifty IT’s price-to-earnings (P/E) ratio stands at 28.9, compared to Nifty FMCG at 38.7 and Nifty Healthcare at 32.23. While Nifty 50’s P/E is lower at 20.13, it includes banks and commodity stocks, which are cyclical and offer lower returns on equity.
Value in large-cap IT stocks
Large-cap IT stocks offer greater value compared to mid-caps, which have seen steeper valuation rises. Over the past few months, large-caps have surged 30-40 percent from their lows. “We were underweight on the sector earlier, but we’ve since increased our exposure. Large-cap stocks look more attractive from a valuation and risk standpoint,” Kartik Kumar, Fund Manager at Axis Mutual Fund said.
IT as a defensive play
Investors see IT as a strong defensive play amid volatile earnings in other sectors. “The sector’s predictable earnings outlook—especially compared to industries with erratic earnings—makes it an appealing defensive option,” explained Thakkar.
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