Time To Get More Positive On Indian IT Services Now, Says Motilal Oswal As It Upgrades Rating To 'Overweight'

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Motilal Oswal Report

Indian markets have bounced back despite one of the heavyweight sectors (Indian IT services) underperforming in the past 12 months, with the Nifty IT Services Index down 12% YoY vs 10% YoY gain in the Nifty-100.

However, we believe that Indian IT services could also be at a bend in the road.

Our IT analyst contends that the wait for the emergence of a new AI services cycle could be in its final legs. Global AI hyper-scalers are now witnessing diminishing marginal utility on AI infrastructure.

Such developments have generally heralded a transition in technology’s evolution from the infrastructure buildout stage to stacking up of applications and services on this infrastructure (e.g., internet, cloud infrastructure).

This transition will now align with the strengths of Indian IT services companies as Gen-AI services are to likely inflect in mid-2026.

Time to get more positive on Indian IT services now:

While the inflection point in Gen-AI services spending may still be a few quarters away, we believe that the past one-year and three-year periods of underperformance (three-year CAGR of 8% for Nifty IT Services Index vs 13%/16% for Nifty-50/Nifty-500) offer attractive valuations to start increasing portfolio weight in Indian IT names selectively and gradually.

Indian 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% (from 19% in Dec’21).

Accordingly, we are now raising IT Services from an underweight position to a mildly overweight by bringing Infosys into our model portfolio.

We believe that Infosys will be a key beneficiary of the enterprise-wide AI spends as its Topaz suite of AI services coupled with capabilities in full-stack app services will be back in preference. Moreover, at the current valuations of 21.7x 12mth fwd EPS, risk-reward is favorable.

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