India Strategy : Raising Indian IT Services to overweight By Motilal Oswal Wealth Management
Raising Indian IT Services to overweight
* A bend in the road for Indian markets…: The Prime Minister’s clarion call for reforms on the Independence Day appears to have marked a decisive bend in the road for broader economic sentiment, corporate earnings prospects, and Indian equity markets, with the crowning glory being the ushering in of GST2.0 reforms. Several ingredients for an uptrend in Indian markets have come together, and the benchmark indices have retraced all of the downdraft posted between Sep’24 record highs and Apr’25. The Nifty-50 is up 4% in the past three months, while the broader market index Nifty-500 is up 3%. In line with our expectations, SMIDs have somewhat underperformed, with the Nifty Mid Cap rising 3% while Nifty Small Cap actually declining 2%.
*- … and likely for Indian IT Services also: 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 1-year and 3-year periods of underperformance (3-yr 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 ow 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.
* Model portfolio stance: We raise Indian IT services to mild-overweight by trimming our position in consumer discretionary and healthcare names. Our preferred sectors are Diversified Financials, IT Services, Automobiles, Telecom, and Capital Goods, whereas our key underweights are Energy, Metals and Utilities.
* New leg of market uptrend on the cards: After having reclaimed the highs, we expect a new leg of uptrend in markets, especially as corporate earnings environment has improved owing to multiple factors such as stimulative fiscal and monetary measures, better liquidity, a likely thaw in the abruptly strained Indo-US relationships and a softer base for demand and earnings. Our bottomup aggregate of analyst estimates suggests 15%+ YoY growth in MOFSL earnings in 2HFY26 after ~11% YoY growth in 1HFY26. As market participants await to see further evidence of percolation of GST2.0 benefits into most consumer goods demand, we believe that the balance-of risk-reward is skewed to the upside and Indian markets should begin to now retrace the underperformance over several of its EM peers – MSCI EM is up 26% in the past year compared to India’s 12%.
* Earnings environment improving: The 2QFY26 earnings season that concluded last week was marked by better traction in earnings beat. For the overall MOFSL universe, PAT growth stood at 12% YoY (3% above our estimates) and sales growth at 8% YoY was 2% above est. Better-than-expected growth was distributed across large-caps (+10% YoY) and mid-caps (+33% YoY), while smallcaps were underwhelming (-5% YoY). The season was marked by more positive surprises than earlier and could be a precursor to a steady earnings momentum, particularly in a backdrop of improving demand impulse (engineered by GST 2.0 rate cuts, lower interest rates and personal income tax savings for the tax paying consumers).
* We stay constructive on Indian equities: We maintain our positive view on Indian equities on the back of an improving earnings momentum, reasonable valuations, a sustained whatever-it-takes approach of policymakers, robust macro markers aided by prospects of a thaw in geopolitical relations, and likely bottoming of FII selling.
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