Whalesbook
Institutional Shift in Indian IT
Foreign investors have withdrawn over ₹20,000 crore from India's technology sector in the latest quarter. This sell-off, contributing to a roughly 24% drop in the Nifty IT index since early 2026, is driven by a shift towards global growth markets and worries about ongoing margin compression. In contrast, domestic institutional investors are taking a contrarian approach, actively buying stakes in established and mid-tier tech firms to offset the foreign capital outflow.
AI Focus Drives Select IT Stocks
This buying activity is highly targeted, focusing on companies integrating artificial intelligence into their business models. Mastek has seen significant domestic investment, with a 6.4 percentage point increase in its stake during March. The company's steady revenue from long-term public sector contracts in the UK and healthcare projects in the US offers predictable income. Hexaware and Infosys are also favored for their AI platforms and partnerships aimed at automating client operations.
Lingering Risks for IT Firms
Despite domestic buying, significant risks persist. A key concern is the potential decline of revenue from legacy software maintenance as clients shift budgets to AI projects. Mid-cap firms like Mastek face procurement and regulatory hurdles in public sector deals, which can cause delays. Infosys, though a market leader, trades at a high valuation that assumes substantial growth, potentially vulnerable to a global recession or reduced IT spending. Hexaware's recent acquisitions, while expanding consulting services, increase execution risk and integration challenges in the near term.
Outlook Hinges on AI Adoption
The future for the IT sector in FY27 largely depends on the pace of AI adoption. While domestic investors anticipate an AI inflection point boosting margins, the broader market is factoring in challenges like rising wages and competition. Without clear evidence of margin improvement through AI, current domestic buying could face a correction if a slowing economy impacts corporate spending.