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The Indian information technology (IT) sector has likely seen the worst, with a recovery expected in 2026 as artificial intelligence (AI) services start to gain wider traction, according to Abhishek Pathak, IT & Tech Analyst, Institutional Equities, at Motilal Oswal Financial Services.
While the upcoming third quarter is expected to be a 'non-event' due to seasonal weakness and furloughs, Pathak maintains a positive outlook for the sector over a two to three-year horizon.
Pathak believes the catalyst for a turnaround will be the resurgence of short-cycle deals, particularly in AI implementation. "We think a leading indicator of IT recovery will be short-cycle deals sort of coming back, and these short-cycle deals will largely be AI implementation deals where enterprises will move from pilots to serious implementation," he stated.
He anticipates this shift to begin from mid-CY26, highlighting the importance of monitoring partnership agreements between Indian IT firms and major AI developers like Anthropic and OpenAI as a key indicator of future trends.
On the debate between mid-caps and large-caps, Pathak noted that while mid-caps have historically held the upper hand over the last five years, large-cap stocks now offer selective value opportunities. "We do believe that large-caps selectively offer great value at these prices as well," he said, suggesting a balanced approach.
He further explained that companies with strong infrastructure management services and data practices might initially outperform those heavily reliant on application development, which could face challenges from AI-driven productivity gains.
Regarding specific stocks, Pathak shared several top picks. Motilal Oswal has recently upgraded Infosys after an eight-month sideline view.
HCL Technologies remains a top pick, described as an 'all-weather stock' with a well-balanced portfolio. Addressing concerns about HCL's valuation premium, Pathak argued that in the current unique business cycle without a clear bellwether, any company that consistently outperforms its peers has a right to be valued at a premium. "If they maintain their growth momentum… I think the valuation premium can be justified," he opined, though acknowledging that margins are a concern.
In the mid-cap space, Coforge is a top pick, valued for its sales engine, growth momentum, and valuation. Commenting on Coforge's recent $2.5 billion acquisition, Pathak viewed it positively from a capability standpoint, despite the price being slightly expensive. "The asset is good. I guess the only concern from our end is the potential dilution that may happen going forward in the next one year," he cautioned.
Other preferred stocks include Mphasis, which he believes has strong deal wins that position it well for the next few quarters, and
Hexaware
, which is seen as being 'primed for a turnaround.'
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While the upcoming third quarter is expected to be a 'non-event' due to seasonal weakness and furloughs, Pathak maintains a positive outlook for the sector over a two to three-year horizon.
Pathak believes the catalyst for a turnaround will be the resurgence of short-cycle deals, particularly in AI implementation. "We think a leading indicator of IT recovery will be short-cycle deals sort of coming back, and these short-cycle deals will largely be AI implementation deals where enterprises will move from pilots to serious implementation," he stated.
He anticipates this shift to begin from mid-CY26, highlighting the importance of monitoring partnership agreements between Indian IT firms and major AI developers like Anthropic and OpenAI as a key indicator of future trends.
On the debate between mid-caps and large-caps, Pathak noted that while mid-caps have historically held the upper hand over the last five years, large-cap stocks now offer selective value opportunities. "We do believe that large-caps selectively offer great value at these prices as well," he said, suggesting a balanced approach.
He further explained that companies with strong infrastructure management services and data practices might initially outperform those heavily reliant on application development, which could face challenges from AI-driven productivity gains.
Regarding specific stocks, Pathak shared several top picks. Motilal Oswal has recently upgraded Infosys after an eight-month sideline view.
HCL Technologies remains a top pick, described as an 'all-weather stock' with a well-balanced portfolio. Addressing concerns about HCL's valuation premium, Pathak argued that in the current unique business cycle without a clear bellwether, any company that consistently outperforms its peers has a right to be valued at a premium. "If they maintain their growth momentum… I think the valuation premium can be justified," he opined, though acknowledging that margins are a concern.
In the mid-cap space, Coforge is a top pick, valued for its sales engine, growth momentum, and valuation. Commenting on Coforge's recent $2.5 billion acquisition, Pathak viewed it positively from a capability standpoint, despite the price being slightly expensive. "The asset is good. I guess the only concern from our end is the potential dilution that may happen going forward in the next one year," he cautioned.
Other preferred stocks include Mphasis, which he believes has strong deal wins that position it well for the next few quarters, and
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