AI Tailwind in IT Stocks: Time to Reboot Your Tech Portfolio?

After one year of sectoral underperformance, Indian IT is quietly undergoing its most radical overhaul since the cloud revolution, this time led by AI. The shift isn't cosmetic; it's existential. GenAI is reshaping services, rewarding agile midcaps and prompting investors to rethink legacy bets. The future of tech belongs to the AI-ready, Abhishek Wani writes [EasyDNNnews:PaidContentStart]

Introduction: From Slowdown to Structural Shift 

The Indian IT sector, long considered a rock-solid bet in investor portfolios, has seen a prolonged lull, with NIFTY IT delivering a negative 7.54 per cent return over the past year ending July 18, 2025. Post-COVID, demand for digital services surged, lifting tech stocks, until FY24 brought slower global growth, cautious enterprise tech spending, and muted hiring, leading to a sharp valuation correction and widespread pessimism. 

Yet beneath the surface, a quiet revolution is taking shape, driven not by cost-cutting or generic digitization, but by Artificial Intelligence. No longer a buzzword tossed around in earnings calls, AI, particularly Generative AI (GenAI), is redefining how IT services are built, priced, and delivered. 

For Indian IT, this could be the biggest pivot since the cloud boom. The real question now isn’t whether the sector is back, but whether your tech portfolio is ready for what's coming. 

Sector Snapshot: Recovery Meets Reinvention
It’s been a slow grind for the Indian IT sector over the last few quarters. Revenue and profit growth have fallen to single digits, largely dragged down by global macro uncertainty. U.S.-based enterprises, which make up a large chunk of the client base for Indian IT firms, have been in a cautious mode, delaying contracts, holding back on discretionary tech spends, and waiting for inflation and recession clouds to clear. 

That’s the bad news. The good news? We’re beginning to see early green shoots. 

TCS recently announced that it’s ramping up deal pipelines tied specifically to AI platform integration. Infosys is realigning its entire services suite around GenAI with domain-specific copilots and consulting. Clients aren’t on the fence anymore. As one Infosys executive put it during a last earnings call: ‘Clients are no longer asking if they should invest in AI, but how fast they can implement it.’ 

The shift is visible even beyond the top-tier firms. Midcap IT companies like Persistent Systems, LTTS, and Coforge are racing ahead with AI-led offerings. They’re embedding machine learning in everything from healthcare analytics to predictive maintenance for industrial equipment. These firms are agile, digital-heavy, and less bogged down by legacy contracts, making them prime contenders in the AI era. 

In other words, the sector is moving from a cost-saving model to a value-creation model, where AI drives efficiency, productivity, and client ROI. And that’s a huge leap. Think of it like the digital transformation phase from 2015 to 2020, but this time, it’s happening faster, with sharper winners and losers. 

Still, challenges remain. High valuations have made investment managers wary. Earnings visibility is patchy, and margin pressure hasn’t completely gone away. But with AI-led services potentially contributing solid double-digit growth in incremental revenue for top firms over the next 3–5 years, many believe the next growth cycle is just getting started. 

The AI Shift: Disruption or the Next Growth Wave? 

Let’s break it down: what exactly is happening with AI that’s making everyone, from top CEOs to retail investors, sit up and pay attention? 

The simplest way to think of this is: AI is doing to Indian IT what the internet did to global businesses in the 2000s—it’s changing the rules of engagement. 

Global AI revenues are expected to grow from $28 billion in 2022 to over $420 billion by 2027, a 15x leap. While India may not be building foundational models like OpenAI or Anthropic, its IT companies are emerging as key enablers— integrating, customizing, and scaling AI for enterprise clients. 

The opportunity is twofold:
1. AI Implementation: Indian firms are building domainspecific copilots, fine-tuning language models, and offering AI-powered decision systems tailored for BFSI, healthcare, and retail.
2. Legacy Modernization: GenAI is being used to wrap and update aging IT systems, enabling better margins and longer client tenures. 

The $3.3 billion WNS-Capgemini deal underscores this shift. Capgemini isn’t buying WNS for outsourcing—it’s acquiring capabilities to build AI-powered operations. WNS, which currently derives just 5 per cent revenue from AI, now has a major runway for growth. While some Large-Caps like Infosys and Wipro face internal hurdles—leadership changes, retraining needs—midcaps are outpacing them with faster GenAI deployment across verticals. Think of this like a chessboard being reset. Past winners won’t automatically stay in the lead. The companies that adapt fast, building IP, forming AI alliances, focusing on enterprise implementation—will emerge as the new champions. And for investors? This isn’t just another trend. It’s a structural shift that could define portfolio performance for the next decade. 

Despite the excitement around AI, institutional sentiment towards Indian IT remains cautious. Most mutual funds maintain neutral or underweight positions in large-cap names like Infosys, Wipro, and Tech Mahindra—primarily due to high valuations and uneven global demand. However, there’s a shift underway. Funds have selectively increased exposure to TCS and midcap players like Persistent Systems, drawn by their execution track records and AI-readiness. FIIs, too, have shown lumpy interest. After net selling through most of FY24, they turned modest buyers in Q2CY25, betting that the worst of the earnings downgrades is behind. But a full-fledged rerating will likely require one thing: tangible revenue growth from GenAI. 

Midcap IT’s Edge: Digital Natives Are Scaling Faster with GenAI 

A quiet revolution is reshaping the Indian IT landscape and it’s not being led by the usual heavyweights. While large-cap firms offer scale and stability, a new class of agile, digital-first midcap IT companies is emerging as the sector’s true growth engine in the GenAI era. 

Persistent Systems exemplifies this shift. Once a niche player, it has repositioned itself as a market leader in AI-led cloud modernization. With over 60 per cent of revenue from digital services and minimal exposure to legacy contracts, Persistent is built for the next tech wave. In FY25, it secured multiple multimillion-dollar deals in BFSI and healthcare—fuelled not just by partnerships with Google Cloud and Microsoft Azure, but by its ability to deliver AI-powered business outcomes swiftly. 

Coforge has also stepped into the spotlight. Renowned for its domain strength in travel, logistics, and insurance, Coforge has rolled out over 200 AI use cases via its proprietary Quasar AI Marketplace. From enhancing airline call centre insights to boosting insurance operations by 30 per cent, the execution is real. With 94 per cent of its workforce trained in AI and over half using GitHub Copilot, Coforge recently outcompeted global giants to win a key Sabre deal—underscoring its rising clout. 

Then there’s Tata Elxsi. Unlike traditional IT firms, it blends engineering design with IP-led innovation. It’s integrating AI into products across automotive, healthcare, and media— reimagining how clients innovate. Its niche capabilities and deep technical strength have made it a favourite among institutional and innovation-focused investors. So what’s fueling this midcap surge? It comes down to three things: 

1. Agility – Leaner structures allow faster AI adoption.
2. Digital - First DNA – Many matured in the cloud-native era, giving them intuitive implementation skills.
3. Deep Vertical Focus – They solve real problems with domain-specific AI. 

Investors have noticed. These firms aren’t just promising a GenAI future, they’re delivering it. And they’re trading at premium valuations, backed by strong deal pipelines and margin visibility. Far from being high-beta bets on large-cap moves, midcaps are becoming the strategic core of future-ready portfolios. This shift challenges investors relying on legacy exposure or passive Nifty IT allocations. Many large-caps continue to struggle with leadership churn, slow GenAI adoption, and generic offerings. They may survive the transition—but are unlikely to lead it. 

For investors willing to realign, this is an inflection point. The time to move beyond the top five IT names is now. Actively managed funds and PMS strategies are gaining an edge as dispersion within IT widens. The blanket approach to tech investing is over. It’s not just Persistent, Coforge, or Tata Elxsi driving this momentum. Affle is leveraging AI in digital marketing; Cyient in aerospace and rail; Happiest Minds in enterprise automation. Hexaware, LTIMindtree, and LTTS are scaling non-linear AI growth across sectors, while even niche players like OFSS, RateGain, and Zensar are embedding AI into industry-specific platforms. What unites these firms is not size, but clarity of execution. They’re building IP, training talent, signing transformational deals—and doing it faster than the giants. 

The message is clear: This is not a fleeting trend. The GenAI wave is accelerating faster than past tech cycles. And as competitive dynamics shift, the firms that move decisively will see sharp valuation re-ratings. 

Valuation-wise, while the broader NIFTY Midcap 150 index trades at a PE of 35.3x, the Mid-Cap IT stocks listed in the below table have a slightly lower median PE of 33.45x, still elevated but below last year’s levels, reflecting some degree of rationalisation. This is notable considering the NIFTY IT index trades at 27.3x, marginally below its 5-year average of 28.8x, signalling a mild de-rating in large-cap IT. Meanwhile, large-cap IT stocks currently trade at a median PE of 24.6x, modestly above the NIFTY 50 benchmark PE of 22.6x, highlighting that mid-cap IT continues to command a valuation premium on the back of selective high-growth visibility. 

Midcap IT is proving that you don’t need deep pockets to lead the AI race, just sharp focus, vertical depth, and speed. They’re no longer the underdogs. In an AI-first economy, they’re setting the pace. For investors, the biggest mindset shift is this: Midcap IT is no longer a risk you take. It’s the future you invest in. 

How Fund Managers Are Recalibrating Tech Portfolios
IT sector funds are mandated to maintain a core exposure, typically at least 75 per cent to traditional IT services. To navigate volatility and performance constraints within this framework, fund managers are increasingly diversifying across the broader tech ecosystem. This includes selective allocations to telecom, digital platforms, and domestic infrastructure enablers—segments that are less dependent on global enterprise tech spending cycles. The focus is now on striking a fine balance between mandate compliance and risk-adjusted returns. 

As one fund manager notes: ‘In diversified funds, we can go underweight when the sector weakens. But in an IT-focused fund, we stay within the mandate—so while 75 per cent remains in legacy IT, the rest is rotated into India-centric digital platforms, telecom, and infra plays. These aren’t traditional IT firms, but they help buffer downside during global downcycles.’ 

Watching for Landmines
Despite the long-term potential of GenAI and digital transformation, fund managers remain cautious of several immediate risks. Chief among them is the lag in monetising AI investments. While companies are pouring capital into GenAI, legacy business lines are declining faster than anticipated— creating a temporary revenue gap. 

Macroeconomic headwinds in the U.S. may further compress discretionary tech spending from key clients. Leadership churn is another concern: firms like Wipro and Tech Mahindra have faced execution challenges due to top-level transitions, particularly in aligning strategy with AI-led positioning. Lastly, there is a valuation overhang. If GenAI adoption fails to scale as quickly as expected, many tech stocks could appear overpriced. As Kotak Institutional Equities cautions, ‘FY2026 is likely to deliver another year of low single-digit growth, especially for incumbents, amid potential deflationary GenAI risks.’ 

What Should Investors Do Right Now? 

AI: From Buzzword to Bedrock
Artificial Intelligence, especially Generative AI, is no longer a speculative trend; it’s now a foundational pillar of IT services strategy. Nearly every large deal today includes an AI component. While large-cap firms are embedding AI to enhance operational efficiency, midcaps are treating AI as a core product and growth engine. 

This shift is strategic and irreversible. Companies that fail to restructure their business models around AI risk obsolescence, not just underperformance. For investors, it’s essential to go beyond headlines and investor decks. Evaluate how deeply AI is embedded in a company’s DNA; look for management vision, deal wins, AI-related R&D spend, and execution clarity. 

Constructing Resilient Tech Portfolios with a Layered Rotation Strategy
With the IT sector undergoing structural shifts—and Generative AI (GenAI) emerging as a core driver of transformation—retail investors, especially active ones, must reassess their tech exposure. A tiered ‘core-satellite’ strategy is increasingly being adopted as a pragmatic way to balance stability with growth. 

◼ The core layer (35 per cent) should consist of large-cap stalwarts such as TCS, Infosys, and HCLTech—firms with robust balance sheets, scalable AI capabilities, and consistent delivery models. These serve as the portfolio’s anchor in uncertain markets.
◼ The satellite layer (30 per cent) is geared toward alpha generation, comprising agile midcaps like Persistent Systems, Coforge, LTIMindtree, and Zensar Technologies. These companies are integrating GenAI rapidly, innovating across verticals, and often outpacing their larger peers.
◼ An additional 15 per cent allocation can target thematic plays in adjacent tech areas like cybersecurity, digital telecom, and cloud infrastructure. Firms such as Affle, Route Mobile, Happiest Minds, and Cyient are riding these high-growth trends. 

Rebalancing the Playbook: The Investor Action Plan In this evolving landscape, having a structured investment approach is critical. Fund managers suggest: 

◼ 30 per cent allocation to AI-driven midcaps to capture vertical innovation and faster GenAI adoption.
◼ 35 per cent allocation to large-cap transformers for stability, execution scale, and balance sheet strength.
◼ 15 per cent allocation to cloud/data/telecom infrastructure players—the digital backbone of the AI revolution. 

Portfolios should be reviewed every 6 to 12 months, with close attention to AI-led deal wins, leadership continuity, and margin resilience. The goal is to shift from defensive holdings to future-ready, AI-aligned businesses. 

Review Frequency: Every 6–12 months based on AI traction, client wins, leadership execution, and margin sustainability. 

Among large-cap IT firms, TCS, Infosys, and HCLTech are spearheading AI integration. TCS’s Ignio, Infosys’s Topaz (with 300+ AI patents), and HCLTech’s infra-focused initiatives highlight their push. Yet, GenAI contributes less than 5 per cent of topline, indicating early-stage monetisation. 

Midcaps, however, are moving faster. Persistent Systems generates over 50 per cent of revenue from digital services, with strong AI traction in BFSI and healthcare. Coforge is advancing in travel and insurance automation, while Hexaware and Mphasis are betting on agentic AI and data engineering. These firms offer deeper vertical integration and faster execution— key advantages in an AI-driven world. 

Large-cap IT stocks remain under pressure, weighed down by muted global tech spending and weak earnings visibility. In contrast, mid-cap IT names are showing a mixed trend, with select players like Coforge and Persistent delivering strong multi-year gains, while others struggle. The most impressive performance comes from cloud, data, and platform enablers, where new-age digital firms like CarTrade Tech, One97 Communications, and Nazara have generated strong alpha over 1–3 years. 

What to Avoid
Investors should consciously avoid companies heavily dependent on low-margin legacy services or those lacking a defined AI roadmap. In a market rapidly shifting towards automation and intelligent value creation, such firms risk structural irrelevance rather than just cyclical underperformance. 

Why Rebalancing Matters
IT still carries substantial weight in mutual fund portfolios, impacting lakhs of retail investors. While FY24 was muted, analysts expect margin recovery and valuation re-rating between FY25–28 as GenAI boosts productivity. Large-caps offer strong balance sheets and cash flows, providing downside protection, but midcaps may drive future growth. Selective, not passive, exposure is the way forward. 

Reality Check: What’s Holding Back the Next Bull Run? 

Despite GenAI optimism, headwinds persist. One market expert warns: ‘IT stocks may stay range-bound due to U.S. macro weakness and rupee strength. A bull run seems unlikely in the near term.’ Cautious positioning is warranted—avoid blanket optimism. The March quarter brought mixed signals. For the first time since June 2020, all large IT firms posted sequential revenue declines in constant currency terms. In contrast, midcaps outperformed, driven by niche verticals and lower exposure to pricing pressure. EBIT margins improved across most companies (except TCS), aided by cost control and rupee depreciation. 

The AI Wave Is Real—But Only for the Ready 

Artificial Intelligence isn't here to replace coders overnight but it is rewriting the way IT services are built, priced, and delivered. For investors, the time to reposition from legacy IT firms towards AI-aligned enablers is now. The GenAI transformation is a multi-decade phenomenon— missing it could mean missing the next wave of tech wealth creation. ‘The 2001 IT boom minted tech millionaires. Those who stayed invested earned 10x to 20x returns. The AI wave could be equally transformative,’ says a veteran fund manager. So the question isn’t whether AI will reshape the industry, it already is. The real question is: Is your portfolio prepared to ride the next decade of intelligent innovation? If not, it’s time to reboot with purpose. 

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