IT stocks set for AI-led revival; Infy, HCL among Motilal Oswal's top bets

Analysts at Motilal Oswal expect an AI-driven turnaround in India's IT sector, with Infosys and HCL Tech positioned to benefit as enterprises shift from AI infrastructure to large-scale deployment.

After nearly two years of subdued growth and infrastructure-heavy technology spending, India’s IT services sector appears poised for a meaningful turnaround. New research indicates that the long-awaited shift from AI infrastructure investment to AI services deployment is nearing an inflection point—potentially unlocking the next multi-year technology upcycle. 

 

Over the past 18–24 months, enterprises globally have channelled their AI budgets largely toward data-centre build-outs, compute capacity and foundational model infrastructure. This capex intensity, which is up 50 per cent and 66 per cent in the last two years, mirrors the 2016–18 cloud build-out cycle, a period during which IT services growth flatlined before accelerating sharply once the infrastructure layer matured. With improvements in chips and LLM capabilities now flattening, the incremental returns from hardware are diminishing, setting the stage for a pivot toward large-scale AI software, application and modernisation work. 

 

Organic revenue growth is expected to revive as early as the second half of FY27, with a more broad-based acceleration through FY28 when enterprises transition from pilot deployments to full-scale AI integration. Industry growth rates, currently at 3–4 per cent, are projected to rise meaningfully toward the 8–9 per cent range as AI-led modernisation, data engineering pipelines and integration programs scale up. 

 

The next wave of spending is expected to centre on application modernisation, cloud-native development, data engineering, enterprise integration and managed AI services. These revenue pools are structurally similar to those that powered the post-cloud upcycle, and are likely to more than offset the ongoing compression in legacy ADM (Application Development and Maintenance) and testing portfolios. As pricing transitions from effort-based to outcome-based models, the sector faces the risk of margin pressure, similar to the 150bp decline witnessed during the last major shift toward fixed-price contracts. Firms with the ability to productize services and adopt software-led delivery models are expected to manage this transition more effectively. 

 

With the sector’s weight in the benchmark equity index at a decadal low (around 10 per cent) despite contributing steadily to overall corporate profitability (15 per cent of index earnings), valuations remain compelling. The business cycle has bottomed out, and the risk-reward is now skewed firmly to the upside as AI services spending enters its deployment phase. 

Infosys – TP: ₹2,150

Infosys stock appears positioned for a meaningful recovery as the industry shifts from hardware-centric AI capex toward services-led deployment. The company’s discretionary-heavy portfolio, coupled with its proprietary AI stack and full-stack application services, is expected to gain traction as enterprises scale modernisation and AI integration programs. Management has raised the lower end of its revenue guidance twice in the first half of FY26, signalling steady demand and healthier revenue quality, with minimal pass-through components. Margin prospects also look firmer, supported by operational efficiencies under Project Maximus. Medium-term expectations point to 5.5 per cent and 8.5 per cent constant-currency growth in FY27 and FY28, with Ebit margins projected to remain around 21 per cent. With improving visibility and an attractive risk-reward setup, the company is positioned to benefit meaningfully from the next phase of enterprise AI adoption.

HCL Tech – TP: ₹2,150

HCL Technologies' robust deal wins of USD 2.6 billion reinforced a healthy demand environment, prompting an upgrade in Services growth guidance to 4–5 per cent for FY26. It delivered an all-round strong performance in the September quarter, with revenue rising 2.4 per cent QoQ in CC & Ebit margins expanding to 17.4 per cent. Momentum was broad-based across IT services and ER&D, supported by firm execution and sustained client spending on modernisation programs. A key highlight was the rapid scale-up of advanced AI offerings, which now contribute 3% of overall revenue. The company’s AI platform deployment across 47 clients, alongside new capabilities such as the AI Factory and AI Advisory, underscores rising traction across technology, manufacturing and BFSI. While wage hikes and restructuring expenses may create short-term margin pressure, the company enters the second half with strong visibility, aided by large transformation deals, easing attrition and sustained productivity gains. HCLT remains the fastest-growing large-cap IT services firm, and we like its all-weather portfolio.  (Disclaimer: This article is by Motilal Oswal Financial Services Research desk. Views expressed are their own.)