India's IT Stocks Are Out Of Favour — But THIS Market Veteran Sees A Hidden Upside

India's IT sector has slipped out of investor's preference, underperforming the Nifty and trading at five-year-low valuations this year. The selloff has been relentless, with FIIs offloading $4.1 billion worth of IT shares since March 2024, dragging their ownership down from 10.3% in January 2025 to 7.4% in July.

Domestic investors haven't stepped in either, with holdings at a record low of under 8%. The reasons are clear: a slowdown in earnings growth, muted AI investments, and mounting global headwinds. Brokerages too remain cautious.

Kotak expects 2–3% annual revenue deflation over the next three years as AI adoption reshapes business models, with customer experience BPOs and app development most vulnerable. Citi projects fiscal 2026 as a third year of sluggish growth, citing structural pressures from AI spending priorities and GCC expansion.

Market expert and founder of Equinomics Research G Chokkalingam agrees the near-term looks bleak. He warns that a slowing US economy, rising tariffs on imports, and inflation pressures will weigh on IT demand. "Industry headwinds are strong. The rupee's likely depreciation may provide some margin relief, but the short-term outlook is not great," he said.

Yet, he sees a silver lining. "Once the US fiscal and trade deficits stabilise, IT could regain strength. Indian IT companies are sitting on healthy cash reserves, creating opportunities for mergers and acquisitions — especially in small and midcaps," he noted, recalling that the sector had seen strong inorganic growth in the 2014–2019 period when Polaris, Mindtree and Mphasis were consolidated.

Chokkalingam highlighted Cyient Ltd. and Oracle Financial Services Software Ltd. as top stocks picks that Equinomics Research is bullish on. In his view, while largecaps face greater risk, attractive valuations, cash-rich balance sheets, and rupee weakness could trigger a bounce back.