Indian IT Sector: Neglected, Not Broken

The Indian IT sector has quietly moved into one of its deepest phases of underperformance in over a decade. While global technology stocks especially AI beneficiaries have captured investor attention, Indian IT services companies have largely been left behind. The result is a sector that today appears underowned, underperforming, and increasingly ignored by markets.

Yet history suggests that such periods of neglect often create the foundation for future opportunity.

Relative Underperformance

Over the past several years, Indian IT stocks have significantly lagged global technology benchmarks. On a rolling three-year basis, Indian IT stocks have underperformed the Nasdaq by nearly 57%, highlighting the widening gap between AI-driven global tech narratives and the relatively steady but less exciting outsourcing model.

Domestically too, the sector has struggled. The Nifty IT index has effectively lost a decade of relative performance versus the Nifty 50, reflecting a combination of slower growth expectations, cautious client spending, and a lack of near-term catalysts. This underperformance has also translated into declining market representation. The weight of the IT sector in the Nifty 50 is now at it’s all-time lows, suggesting that the sector is currently under-owned relative to its historical importance in Indian equity markets

Cycles of Fear Are Not New

Investor skepticism around Indian IT is not unprecedented.

A similar narrative emerged during 2016–2017, when clients began shifting from traditional outsourcing models to digital transformation and cloud-based solutions. At that time, investors worried that legacy outsourcing companies would struggle to adapt. Growth slowed, margins came under pressure, and the sector derated.

However, Indian IT companies eventually adapted their delivery models, invested in digital capabilities, and regained growth momentum. The sector demonstrated an ability to evolve alongside technological change rather than be disrupted by it.
The current AI transition may appear more dramatic, but history suggests that adaptation has been a recurring strength of Indian IT services firms.

Deep Corrections Often Precede Strong Recoveries

Another important observation from market history is that large drawdowns in the IT sector have often been followed by strong forward returns.
Periods where the Nifty IT index has corrected 20–30% from peak levels have historically been followed by meaningfully stronger average returns over the subsequent two years.
Currently, the sector is again in one of its deepest phases of relative underperformance. Several constituents of the Nifty IT index are trading in oversold territory, reflecting extreme pessimism in investor sentiment.

While sentiment-driven corrections can persist, they often create valuation resets that improve forward return potential.

Valuations Are Becoming Reasonable

One of the more notable changes in the current cycle is the reset in valuations across large IT companies.
Several major IT firms have corrected meaningfully from their earlier peaks, bringing valuations closer to long-term averages. In many cases:

• Forward P/E multiples are now close to or below historical averages since the Global Financial Crisis
• Return on equity remains strong
• Cash balances and free cash flow generation remain healthy

These are not characteristics of structurally impaired businesses. Rather, they suggest high-quality companies temporarily trading at more reasonable valuations.

Strong Fundamentals Beneath Weak Sentiment

Despite the weak market narrative, the underlying financial profile of the sector remains robust.
Across the Nifty IT index:

• Many companies continue to generate strong ROEs
• Balance sheets remain cash-rich and strong
• Free cash flow generation remains healthy
• Total Contract value (TCV) continues to grow

In fact, nearly 60% of the index (by market capitalization) is currently trading below the 33rd percentile of its historical valuation range, despite these strong fundamentals.

This combination solid fundamentals with depressed valuations are typically what characterizes sectors that are temporarily neglected rather than structurally broken.

AI: Threat or Transition?

The current narrative around AI has largely favored global platform companies, semiconductor manufacturers, and hyperscalers. Indian IT services firms, which operate further down the technology stack, have not benefited from the same enthusiasm.

However, it is important to distinguish between AI creators and AI adopters.

Indian IT firms have historically thrived by implementing new technologies for global enterprises whether it was ERP systems, cloud migration, digital transformation, or cybersecurity. AI may ultimately become another such technology wave where these companies help enterprises integrate and operationalize AI solutions at scale.

The transition may take time, but writing off the sector’s ability to adapt may be premature.

This reminds me of a recent Public announcement made by a major AI domain company.

“There’s a big gap between an AI model that works in a demo and one that works in a regulated industry. And if you want to close that gap, you need domain expertise.”
Interestingly, they partnered with an Indian IT services company for that expertise.

Where are we Now?

At present, the Indian IT sector appears to be in a phase characterized by:

• Weak sentiment
• Slower growth expectations
• Valuation compression
• Reduced index weight and investor ownership

But beneath these headwinds lies a group of companies with strong balance sheets, disciplined capital allocation, and resilient business models.

Previously, we had communicated on this sector in October 2025, highlighting that a further correction in prices could improve the margin of safety. Since then, the ongoing AI-driven narrative has led to additional corrections in the sector, which may have improved the odds from a valuation perspective. In this context, a balanced investment approach combining a partial lump-sum allocation along with systematic investments (SIPs) may be a prudent way to participate in the sector.
Because in markets, the most interesting opportunities often emerge not when sectors are celebrated but when they are forgotten.