Foreign funds return to Indian tech stocks on AI growth bets

Global money managers are warming up to the shares of Indian software exporters again as they focus their activities on artificial intelligence.While revenues from developing AI-based products are still small, analysts and investors are excited about the growth shown by companies including Tata Consultancy Services Ltd., Infosys Ltd. and HCL Technologies Ltd. TCS said revenue from AI products in the three months ended December rose 17% from the previous quarter, while HCL Tech rose 20%.

Foreign funds bought information technology stocks worth 45 billion rupees ($495 million) in the two weeks ended Dec. 31, a first since May, data compiled by the National Securities Depository Ltd. showed. The purchase proved prescient as an NSE gauge for technology stocks is on track for the best month against the benchmark Nifty 50 since November 2024.“Confidence in the visibility of the company is much higher, and that gives us comfort,” said Aishvarya Dadheech, founder and chief investment officer at Fident Asset Management. “The sector is now in a good position and we see this as a marketable opportunity.”

Software exporters in India had fallen out of favor with investors over concerns that they were underinvesting in artificial intelligence. That bearishness is starting to wane as companies like TCS and HCL Tech ramp up AI investments, while Infosys says AI-related customer spend will boost margins.

That said, profits at the country’s six largest IT companies fell short of consensus estimates in the three months through December, as companies adjusted costs to comply with India’s new labor rules.

Wipro Ltd., one of Asia’s largest IT services companies, saw its shares fall 8% on Monday after saying deal profits fell 9% from last year. The shares of LTIMindtree Ltd. fell Tuesday after third-quarter earnings missed the average of analysts’ estimates.

“As the growth prospects of IT companies vary significantly, a bottom-up approach is more appropriate,” wrote analysts led by Akshat Agarwal of Jefferies Financial Group Inc. this week. The brokerage prefers Infosys and HCL Tech among the large-cap companies, Coforge Ltd. and Mphasis Ltd. among the midcaps, and Sagility Ltd. and Inventurus Knowledge Solutions Ltd. among the small caps.

Still, the odds in the AI ​​ecosystem and the weaker rupee favor software exporters. From leading companies to smaller peers like LTIMindtree, the latest quarter’s earnings calls show a shared approach: moving generative AI from pilots to early production, embedding it into delivery platforms and employee workflows, and prioritizing efficiency-based use cases over standalone AI offerings.

Sales growth for components of the Nifty IT Index is expected to improve to 8.7% in the fourth quarter, compared to the expected 6.8% for October-December, data compiled by Bloomberg showed. A rise in AI-related spending could help restore earnings momentum for the sector that accounts for nearly 11% of the Nifty 50.

“All the major companies that fell short of estimates were a surprise, but the operational performance and AI capabilities are strong enough to revive hopes for the sector,” said Karthick Jonagadla, founder of Mumbai-based Quantace Research & Capital Pvt.