IT Stocks Enter A Sweet Spot: Infosys, Tech Mahindra, Mphasis Among Top Picks

Indian IT stocks appear to be entering a rare and promising sweet spot, where currency support, attractive valuations and improving sector sentiment are beginning to converge after a prolonged phase of underperformance.

Despite global tech spending remaining somewhat cautious, the broader Indian market has recovered strongly, leaving IT behind long enough for it to start looking meaningfully undervalued.

With the rupee weakening to record lows, AI-led services demand gradually taking shape and commentary from sector leaders turning more constructive, the foundations for a revival are steadily strengthening.

A key driver of optimism is the weakening rupee, which has slipped close to 89 against the dollar. This depreciation is inherently positive for IT companies because a majority of their revenue is billed in US dollars.

Valuations add another compelling layer to this story. After one and a half to two years of steady underperformance, IT stocks are now trading at levels that many fund managers consider attractive.

The sector’s weight in the benchmark index has also dropped to a ten-year low of around 10%, compared to 19% in December 2021, said Motilal Oswal in its note on Monday.

Yet its contribution to Nifty profits has remained stable at about 15% for four consecutive years, signalling resilience in underlying earnings.

The combination of depressed stock prices and stable profitability means investors today can access marquee IT companies at roughly 4% dividend yields, an unusually generous entry point for quality technology names noted Parag Thakkar, Head, Fund Manager, Fort Capital.

Market behaviour also supports the idea that IT may be bottoming out. The Nifty IT index, which had been stuck below resistance levels for months, is now showing signs of breaking out, said Kush Bohra, Founder Kushbohra.Com.

The narrative around artificial intelligence is also undergoing a significant shift. For much of the past year, AI was perceived as a headwind, with enterprises allocating budgets towards hardware and foundational infrastructure rather than services. However, companies such as Tech Mahindra now believe AI is transitioning from a challenge into a clear tailwind.

The hardware-to-services pivot will begin to take hold, deal sizes in AI are expected to become larger in the next quarter, and there will be meaningful revenue contribution from next year onwards pointed Thakkar.

He also added that there has been an inflection point coming in in terms of commentary from management, which has turned positive over the quarter.

Meanwhile, Motilal Oswal suggests that the real inflection point for GenAI-driven services spending is only a few quarters away. This positions companies like Infosys, which is deeply embedded in enterprise-wide AI transformation, as likely beneficiaries of the next wave of tech modernisation.

While enthusiasm is rising, not everyone believes the sector is in full-fledged recovery mode yet. JP Morgan’s Rajiv Batra argues that it may be too soon to declare that we are in a large-scale AI adoption phase, suggesting instead that the sector is in a mid-cycle position.

This view is shared by several global strategists who acknowledge improving conditions but prefer to wait for clearer demand signals before calling a new long-term uptrend. Still, the tone is noticeably more optimistic than it was even a few months ago.

Across the board, certain stocks consistently emerge as preferred picks. While Bohra picked Persistent, Coforge, HCLTech, Thakkar's top picks include Infosys, Tech Mahindra and Mphasis.

Interestingly, Motilal Oswal raised Indian IT Services to 'Overweight'. In addition, it has upgraded the rating for Infosys, Mphasis and Zensar Technologies to 'Buy' from the earlier 'Neutral'.

It also upgraded Wipro to 'Neutral' rating from its earlier 'Sell'.