Foreign funds return to Indian tech stocks on AI growth bets

While the revenues from development of AI-based products are still small, analysts and investors are enthused by the growth demonstrated by companies, including Tata Consultancy Services Ltd., Infosys Ltd. and HCL Technologies Ltd. TCS said revenues from AI products grew 17% in the three months ended December from the prior quarter, while those for HCL Tech jumped 20%.

Foreign funds purchased information technology stocks worth 45 billion rupees ($495 million) in the fortnight ending Dec. 31, a first since May, data compiled by the National Securities Depository Ltd. showed. The buying proved prescient as an NSE gauge of tech stocks is on pace for its best month against the benchmark Nifty 50 since November 2024.

“Confidence around business visibility is much higher, and that gives us comfort,” said Aishvarya Dadheech, founder and chief investment officer at Fident Asset Management. “The sector is now in a sweet spot, and we see this as a tradable opportunity.”

Bloomberg

Live Events

Software exporters in India had fallen out of favour with investors over concerns they were under-investing in artificial intelligence capabilities. That bearishness is beginning to ebb as companies like TCS and HCL Tech step up AI investments, while Infosys says AI-related client spending will boost its margins.

That said, profits at the country’s six largest IT firms fell short of the consensus estimates in the three months through December after companies adjusted costs to comply with India’s new labour rules.

Wipro Ltd., one of the biggest IT services firms in Asia, saw its stock plunge 8% on Monday after flagging that deal wins fell 9% from last year. LTIMindtree Ltd.’s shares slumped on Tuesday after its third-quarter profits missed an average of analysts’ estimates.

“With meaningful divergence in growth outlook of IT firms, a bottom-up approach is more suitable,” analysts led by Akshat Agarwal at Jefferies Financial Group Inc. wrote this week. The brokerage prefers Infosys and HCL Tech among large-cap firms, Coforge Ltd. and Mphasis Ltd. among midcaps, and Sagility Ltd. and Inventurus Knowledge Solutions Ltd. among smallcaps.

Bloomberg

Still, opportunities in the AI ecosystem and a weakening rupee are favouring software exporters. From bellwether firms to smaller peers such as LTIMindtree, earnings calls for the latest quarter are showing a shared approach: moving generative AI from pilots into early production, embedding it into delivery platforms and employee workflows, and prioritising efficiency-led use cases over standalone AI offerings.

Topline growth for components of the Nifty IT Index is expected to improve to 8.7% in the fourth-quarter from 6.8% projected for October-December, data compiled by Bloomberg showed. A pickup in AI-related spending can help revive earnings momentum for the sector that accounts for nearly 11% of the Nifty 50.

“All big companies trailing estimates were a surprise, but operational performance and the AI opportunity are strong enough to revive hopes for the sector,” said Karthick Jonagadla, founder of Mumbai-based Quantace Research & Capital Pvt.