Indian IT stocks rally 12% in a week – Is the turnaround sustainable?

Indian information technology staged a comeback last week, with stocks in the sector rallying after better-than-expected results from major players.

The Nifty IT index has risen for three consecutive weeks now. The index gained nearly 12% last week, the sharpest jump in 18 years. The uptrend was driven by better earnings, improving deal momentum and attractive valuations following a prolonged correction, according to analysts.

HCL Technologies, Wipro, Tech Mahindra, Tata Elxsi, Tata Technologies, and Persistent Systems released their results for the second quarter of financial year 2027 (Q2FY27) last week.

A global sell-off in artificial intelligence-led stocks also prompted investors to rotate towards the Indian IT sector. “Additionally, concerns over returns on global AI infrastructure investments triggered a rotation from AI hardware stocks towards traditional IT services, with increase in yields on the back of higher than expected US CPI and PPI print,” said Sushovon Nayak, Research Analyst at Anand Rathi Institutional Equities.

Nayak said that “sentiment was further supported by a correction in leveraged AI plays (neoclouds such as Coreweave, Nebius, Oracle) following reports that OpenAI’s September ARR stood at ~50bn,belowthe~70bn investors had anticipated, raising concerns over AI monetisation and the sustainability of AI infrastructure financing, thus raising concerns about AI-related valuations and led to rotation towards traditional IT services stocks.”

However, at a time when crude oil prices are hovering around $110 per barrel and foreign investors are continuously selling Indian equities, market participants are worried if the rebound in the domestic IT sector is sustainable.

“The latest quarterly numbers are encouraging, but it is too early to call this a sustainable turnaround,” said Arun Kailasan, Research Analyst at Geojit Investments. “Profitability held up better than feared, deal pipelines remain healthy, and AI-led revenue is scaling steadily, which has helped restore some confidence in the sector,” Kailasan said.

Despite the firm results, underlying revenue growth remains subdued and the near-term outlook from tech majors points towards a continued cautious demand environment. “The rally has also drawn heavily on external triggers such as easing bond yields and a rotation away from AI-linked stocks, which may not last,” Kailasan added.

A sustainable recovery also depends on how quickly new deals turn into revenue and how fast AI-led engagements grow enough to offset the cannibalisation of traditional service lines. “Until incremental AI revenue clearly outpaces the productivity-led deflation in the legacy book, the move is better read as a sentiment-driven recovery than a structural turnaround,” he said.

Anand Rathi Institutional Equities’ Nayak said a sustainable turnaround will require consistent revenue acceleration and stronger deal conversion. “We believe the sector is approaching a gradual recovery, although the sharp re-rating appears ahead of fundamental improvements,” he added.

The AI-led productivity deflation remains a near-term headwind and the main concern. The management of tech companies have acknowledged that AI is reducing the effort needed to deliver existing work, which is eroding revenue from traditional service lines, and they are not yet ready to say this deflationary phase has passed.

“Client spending also remains selective with discretionary programmes still under close scrutiny, and seasonal furloughs likely to weigh on the third quarter(Q3FY27). Deal momentum, by contrast, has stayed healthy across most large players, which gives some comfort on demand visibility.

The key test is how quickly these bookings turn into revenue, because that will determine whether strong deal wins lead to a real pickup in growth,” Kailasan said.

After Tech Mahindra’s recent re-rating, Nayak says LTM offers a relatively better risk-reward.

LTM is trading at 19 times estimated FY28 earnings and 18 times estimated FY29 earnings while Tech Mahindra trades at 20 times estimated FY28 earnings and 19 times estimated FY29 earnings.

“However, we would prefer to accumulate LTM on corrections. Mphasis is also one of our top picks, which is poised to benefit from increasing US BFSI tech spend.”

Last week’s rally in IT stocks was driven by global AI-sell off and improved earnings of domestic majors. But a sustainable recovery now depends on new deals turning into revenue quickly and the pace of growth in AI-led engagements.