Chandrachoodamani NV and Vidya Bala
The recent rally in Indian IT (Information Technology) stocks has brought up a common question from investors. Is it just a relief rally or is it time to bargain-hunt these IT names?
What has revived interest in the down-and-out IT stocks is that in the last one month (July 2026), the Nifty IT index has outperformed the broader market meaningfully, rising by 16.4% versus just 0.86% for the Nifty 50. There are several post facto explanations from market experts – relief after deep pessimism, short covering, valuation comfort when the rest of the market is expensive, foreign investors hedging against the crowded AI infrastructure and semiconductor trade and so on. There have also been stock-specific triggers such as some new AI partnerships.
These explanations may all contain a grain of truth. But to us, they do not offer conviction to formulate a fundamental thesis for investing in frontline IT companies for now. Here’s why.
Why IT Stock Prices Move Beyond Earnings and Valuations
There is an old market saying that stock prices are slaves of earnings. Over long periods, that’s true. But over shorter horizons, liquidity, positioning, and narrative can overpower fundamentals.
That is because the market is not one investor with one style. It is a battleground of participants with entirely different motivations and time frames – trend followers, growth investors, value investors, macro allocators, contrarians, passive flows, and traders chasing momentum. Each of them attaches a different meaning to the same price movement.
The result is a constant shifting of narratives. One week, AI is a once-in-a-generation opportunity for Indian IT and every player with a delivery engine is a future winner of huge AI transformation deals. Another week, AI becomes the reason traditional IT services will be disrupted, margins compressed and pricing power eroded. Prices swing sharply between these interpretations without the underlying business changing very much at all.
However, when a sector starts outperforming the market, the urge to call the bottom, to challenge consensus, or to appear smarter than the crowd often pushes investors into contrarian trades that may have no analytical foundation.
Two Questions To Ask
At PrimeInvestor, to gain conviction about any stock, we ask two questions.
- Is there a long-term future for the business that is being bought, say 5 years from now?
- Is it possible to estimate the growth rate of that business over the next 3-5 years, and assess current valuation against that growth with some confidence?
If these two questions cannot be answered convincingly, we don’t take that bet.
Yes, individual investors may still take that bet for other reasons.
- Affection/bias for the company
- Trust in the promoter
- A belief that the market is wrong and they know something more
- Confidence that valuations cannot get cheaper
- Comfort with a low multiple
- Attachment to a macro view such as “AI is a bubble” or “Jevon’s paradox will rescue demand.”
These are subjective bets, which sometimes make money. But this is not a repeatable process for long-term results.
This is why a stock or sector can bounce and still not build conviction. It can rise because pessimism had become too extreme. It can rise because a sector was under-owned. It can rise because global money needed a temporary hiding place.
None of these automatically tell us what the business will earn three years out, or what role it will occupy five plus years from now.
When can we turn positive on IT stocks?
We are not going to answer the seemingly simple question on whether the IT bounce is well-backed or not. The reason is we do not have evidence for either of the cases. We think the questions that can provide such evidence are much harder to answer at present.
- Can traditional IT services companies like TCS and Infosys protect relevance in a world where AI lowers coding intensity, automates maintenance, and changes the way enterprises buy technology?
- Will these companies be able to leverage their client relationships, data estates, domain depth, and managed-services capability to become enablers of enterprise AI adoption, rather than become casualties of it?
There are no clear answers right now. The present rebound has come after a phase in which the sector was hit by worries over weak discretionary spending, slower client budgets, multiple compression, and fears that rapid AI advances could displace parts of traditional services work. If that is true, then the rally is a relief move. But relief moves are not the same as a business-cycle turn, and neither are they proof that the long-term growth algorithm is intact.
For serious investors, conviction in IT will require signs that go beyond price action:
- Evidence that global client budgets are normalizing
- Clarity on AI being monetized by enterprises, making them willing to spend on AI
- Improving deal wins for Indian IT companies in enterprise AI (the genuine kind, not AI-washing!)
- Signs that this deal value will more than make up for the inevitable topline erosion from AI adoption and non-headcount-based billing in their own operations
- Confidence that future earnings for Indian majors can grow and compound and that they will not be reduced to mere dividend plays
For names like TCS and Infosys specifically, the question is whether their scale, client stickiness, and AI-investment plans can translate into sustained revenue and margin growth, or whether they are simply benefiting from a temporary ‘anti-AI’ trade.
Until those answers are clear, we will not have an answer on whether we will bet big on frontline IT service companies. It is another matter that we have identified pockets of opportunities in mid-tier IT and have also managed good returns in such stocks in our Portfolio Management Service.
When bluechips remain bargains
In the last 5 years, some of the most respected Nifty names have gone through prolonged periods where the franchise remained credible, but the stock went nowhere or disappointed badly because of a fundamental reset in the business. That includes companies such as HDFC Bank, HUL, and ITC. These examples illustrate that even the bluest of bluechips can spend years without delivering returns, if there’s uncertainty on growth sustaining.
#1 HDFC Bank: Quality franchise in a long reset
HDFC Bank has become one of the clearest examples of this phenomenon. The franchise remains one of strongest private-sector banking platforms in India, yet the stock has deliver a near-zero return over 5 years, as the bank’s merger with HDFC, led to post-merger balance-sheet bloat, pressure on margins, deposit mobilisation challenges and governance-related overhang.
Media reports in 2026 highlighted several issues weighing on sentiment: slower-than-expected improvement in the loan-deposit profile after the HDFC Ltd merger, net interest margin pressure, concerns around the resignation of former part-time chairman Atanu Chakraborty, and later scrutiny around an internal vigilance investigation related to certain payments. This showed that even a premier franchise can trade poorly when near-term earnings growth is under pressure and there are continuous pinpricks of bad news.
This does not automatically make the stock a sell, but it shows why the recovery is taking time. If the long-term franchise remains strong and earnings power normalizes over time, HDFC Bank may recover meaningfully. But as long as the medium-term growth path is cloudy, a rerating may not take shape quickly.
#2 HUL: Strong brands don’t mean strong returns
Hindustan Unilever offers a different version of the same lesson. It remains one of India’s strongest consumer franchises, yet the stock has delivered a negative 10 per cent in the last five years, because HUL’s growth has failed to live up to expectations embedded in the valuation.
The emergence of quick commerce as a key channel of consumption has weakened the bargaining power that giants like HUL always enjoyed relative to trade. At the same time, HUL faced new competition from nimble D2C challengers in high-margin categories such as personal care and packaged foods, as they could now reach out directly to the young demographic through digital advertising. Yes, HUL has been reworking its product and distribution strategy, but a behemoth of its size takes much longer to pivot than smaller firms.
#3 ITC: Capital allocation, not tax, is the real question
ITC is a good example of a company with a healthy balance sheet and high cash flows which has been steadily derated by markets in recent times. ITC is often viewed from the lens of cigarette taxes and regulatory risk. But for long term investors in the stock, the real issue lately has been capital allocation.
The cigarettes business has historically generated very high returns on capital. By contrast, the non-cigarette FMCG businesses, hotels, paperboards, and agri-trading have earned low returns on capital, far below the cigarette business. The hotels business, now listed separately, illustrates the issue clearly.
For investors, the critical question now is not whether ITC has fallen enough or whether cigarette volumes will recover from the tax hit. It is whether the capital being deployed outside cigarettes will pay off and eventually make up for the constant regulatory headwinds that threaten the cigarette business.
The structural issue with some index stocks
These examples matter because they illustrate something broader about the Indian market at this point in time. A meaningful share of the benchmark Nifty 50’s weight sits in large, established sectors and companies whose franchises are real, but whose growth vectors are either maturing, resetting, or facing structural ambiguity.
At the same time, global market leadership has shifted toward businesses linked to deep technology, semiconductors, advanced software, and alternate energy. The US has continued to innovate aggressively, while China has built scale and manufacturing depth in several emerging areas. India has strengths, but its listed market does not yet offer broad index representation across many themes which are the current hot favourites globally.
This is creating a sense of missing out for investors comparing domestic benchmark returns with global narratives. It is also challenging for passive and index-led investing, because benchmark composition may not reflect the sectors leading global capital cycles.
You Can Still Find Growth Opportunities in India
All this however should not be confused with pessimism about India’s market opportunity, which in our view remains vast and promising. We firmly believe that there are many bright spots to fill a portfolio for investors willing to look beyond the obvious.
One visible example is manufacturing. Bajaj Auto (taken as an example), one of India’s oldest manufacturing companies, has continued to demonstrate that age, scale, and global competitiveness can coexist. It has delivered very strong recent performance, and its international exposure shows that Indian companies can build earnings engines far beyond domestic demand alone.
There are also promising currents in pharmaceuticals and healthcare manufacturing. India is participating in complex opportunities around GLP-1s, peptides, and biosimilars, and these are not merely domestic stories. They are tied to global supply chains, scientific capability, and regulatory execution.
In parallel, trade deals, strategic partnerships, and domestic policy support are gradually strengthening capabilities in engineering, R&D, automobiles, defence, and space. None of these themes may be as fashionable as the global AI trade. But what matters is whether durable businesses are being built and whether their earnings trajectories can be estimated.
PrimeInvestor’s Framework for Long-Term Stock Selection
Different investors and fund managers can have different philosophies. But we believe it is important to have a process, whatever the philosophy. We believe that investing does not require mastery over every business, sector, or index move, or knowledge of all 5,000-odd listed companies. It only requires sound understanding of the businesses we own or plan to own.
If capital is allocated because the business’s long-term future is understandable, its medium-term growth path is estimable, and its valuation is favourable relative to that path, then our conviction rests on a proper foundation. Everything else in our view, is just noise.
Disclaimer: Stocks are mentioned for illustrative purposes only and are not to be construed as recommendations.
