The year 2025 proved challenging for India's information technology sector, with its benchmark index significantly lagging the broader market. While the Nifty 50 climbed a healthy 10.51%, the Nifty IT index moved in the opposite direction, registering a decline of 12.6%.
A Sector in Correction: Major Players Hit
The downturn was broad-based, impacting most of the industry's heavyweights. Leading firms like TCS, Infosys, and HCL Technologies witnessed double-digit losses in their stock prices over the course of the year. This underperformance highlighted the persistent pressures from global macroeconomic uncertainty and cautious enterprise spending on traditional IT services.
However, this sharp correction has not gone unnoticed by market analysts. Many have begun to identify emerging value, pointing to a fundamental shift in the nature of demand that could redefine the sector's trajectory.
The AI Catalyst: Paving the Way for Structural Growth
According to Seema Srivastava, Senior Research Analyst at SMC Global Securities, the Indian IT industry is on the cusp of a major transition. She anticipates a move from a cyclical recovery to a structural growth phase in the financial year 2026 (FY26), primarily fueled by artificial intelligence.
"Large Indian IT companies are experiencing a meaningful improvement in deal quality," Srivastava noted. "Nearly three-fourths of new contract wins are now linked to AI-led services, including generative AI, machine learning, analytics, and intelligent automation."
This shift, she underscored, marks a clear departure from the demand slowdown of recent years. It enhances revenue visibility and makes large IT companies attractive as core portfolio holdings for investors seeking stability and strong financials.
Earnings Resilience and Future Projections
Srivastava acknowledged that global headwinds may continue to affect discretionary spending on traditional services. Yet, she emphasized that sustained client investments in AI, cloud migration, data platforms, and cybersecurity will support earnings resilience and enable gradual margin expansion for IT firms.
Her growth outlook is optimistic. "Growth for Indian IT services is expected to improve to the mid- to high-single-digit range over FY26–FY27," she said, aided by AI-led deal ramp-ups and vendor consolidation. Furthermore, India’s overall IT spending is projected to exceed $176 billion in 2026, a trend expected to benefit large incumbents with scale and execution capability.
Expert Consensus: Recovery Gaining Momentum
The positive sentiment is echoed by other analysts. Ajit Mishra, SVP of Research at Religare Broking, highlighted that market sentiment is turning more optimistic. Expectations of interest rate cuts by the US Federal Reserve and the rapid adoption of AI are beginning to positively influence client spending decisions.
"Management commentary across leading IT companies suggests that the recovery is likely to gather momentum by mid-FY26 and strengthen further into FY27 as discretionary technology budgets reopen," Mishra stated. He believes the sector is at the start of a new, more disciplined, AI-driven growth cycle.
Stock Picks and Investment Strategies
With the landscape evolving, experts have identified specific companies that appear promising:
- Ajit Mishra sees short-term potential in HCL Tech and Tech Mahindra.
- Prashanth Tapse, Senior VP (Research) at Mehta Equities, suggests Coforge as a mid-cap pick and Infosys among large-cap companies.
However, Tapse also offered a note of caution regarding stock-specific volatility. "Sector rotation has been very sharp, and IT stocks tend to correct suddenly even when there is no change in fundamentals," he said. For many investors, he prefers recommending the Nifty IT Exchange Traded Fund (ETF) as a way to gain exposure to the sector's recovery while mitigating individual stock risk.
The consensus among analysts is clear: while 2025 was a year of correction and underperformance for Indian IT, the seeds for the next growth wave have been sown. The sector's future is increasingly tied to its ability to deliver on high-value, AI-driven digital transformations for global clients.
