Indian IT Stocks: Are They Ready for a Comeback?

Indian IT stocks have not set Dalal Street on fire over the last few years.

Investors are aware that the recent performance of these stocks have not been impressive.

But the long term performance is also not good.

One look at the chart of the BSE IT index will tell you that quite clearly. Essentially, over the last four years, the index returns have been zero.

BSE IT Index - 5 Years

Sure there have been bullish periods. The spectacular rally after the covid crash in 2020 made the sector one of the best performers on the stock market.

The rally from April 2023 to December 2024 was also quite profitable for investors.

But all things considered, the long term returns - barring a few exceptions - have been muted.

Now, it's not as if the sector has performed badly... but long term investors, especially those who bought IT stocks after 2020, won't be very happy with their returns.

So, what's the outlook for the IT sector?

Let's find out...

Strong Position in the Global Tech Industry

India is the leading IT sourcing destination in the world, with a market share of about 55%.

India's IT industry estimates that it's likely to hit the US$ 350 billion (bn) revenue mark by 2026 and contribute 10% towards the country's GDP.

These estimates also say that the industry on track to achieve a revenue of US$ 500 bn by 2030.

This position has been achieved through a combination of cost arbitrage, high-quality and reliable services delivery, as well as strong domain experience and client relationships built over the years.

Indian IT firms have set up software development centers all over the world, especially in developed nations where the demand for software services is the highest.

These firms are not resting on their laurels. They have entered into strategic alliances with top international firms, across many industries, to strengthen their respective competitive positions.

And it's not just services; the IT product industry in India is growing strongly too. As per the IBEF, this industry is expected to reach US$ 100 bn in revenue this year itself (2025).

In light of increasing competition, Indian software companies are focused on international expansion to enhance their global pressence but also to move up the value chain.

Indian companies are also focusing on newer models such as platform-based services and creation of intellectual property.

Good Company Fundamentals

Indian IT companies have traditionally been run well by their owners and managers.

The global nature of the business instilled a sense of professionalism in the workforce right from the early days of the industry.

The listed IT companies, for the most part, are fundamentally strong, usually debt free, have stable margins, strong free cash flows, good dividend policies, and high return ratios.

You can check out Equitymaster's stock screener to find the top IT companies in India.

However, the sector is currently going through a serious challenge which has impacted sentiment on the stock market.

The Big Growth Challenge

It's not breaking news that artificial intelligence (AI) is taking over the world.

Long-term investors are concerned that the revenue growth of Indian IT companies will be affected by the rise of AI.

The ever increasing uses of AI is directly tied to the slowdown in technology spending in the western world. Partly this is explained by macro factors but the widespread use of AI is also playing its part.

Across industries, clients of Indian IT companies are shifting their focus from relatively simple AI use cases to more complex AI applications to justify their return on investment.

Indian IT companies have invested considerable time and money to get the entire workforce AI ready so as to be prepared for this disruption.

The industry's future revenue growth will depend a lot on how it fulfils the demand for AI-related services in the face of intense competition.

And that will decide the future of the stock prices of these companies.

Conclusion

Investors considering IT stocks should ideally broaden their horizons. Consider technology stocks as a whole, instead of limiting one's options to just software.

Technology stocks are not just limited to the IT industry but encompass many other new technology company stocks.

Several other industries make up the technology space and companies are sprouting up in defence technology, semiconductors, and sustainable technology.

These are also newer fields like cybersecurity, AI and IoT as well. Technology applications are almost limitless and expanding into different areas.

Thus, keeping an open mind and digging deep into the ecosystem will likely result in more opportunities for an enterprising investor.

Investors should evaluate the company's fundamentals, corporate governance, and valuations of the stock as key factors when conducting due diligence before making investment decisions.

For more details, check out our IT sector report.

Also, check out Equitymaster's stock screener to find the best Artificial Intelligence stocks in India and the top Internet of Things (IoT) stocks in India.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...