Tech blitz! Nifty IT logs best monthly gain in 6 years. Is the worst over?
The Nifty IT pack rebounded with an 18.4 per cent rise this month. Before this, Nifty IT's best show was in June 2020 when it rose 22.5 per cent.
 "Tech blitz! Nifty IT logs best monthly gain in 6 years. Is the worst over?")
July was a tale of two stories for the technology sector. At a time when global tech stocks fell like ninepins, the beaten-down Indian IT services sector touted the 'reverse AI trade' and scripted history — recording the best monthly performance in six years.
The Nifty IT pack rebounded with an 18.4 per cent rise this month. Before this, Nifty IT's best show was in June 2020 when it rose 22.5 per cent.
Nifty IT logs best monthly show since July 2020
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The rally has been broad-based, with all 10 constituents rising and adding a whopping Rs 3.9 trillion to investor wealth during this period. Seven stocks rose in double digits, gaining between 15-27 per cent, shows data from ACE Equity.
Industry leader Tata Consultancy Services (TCS) surged 19.7 per cent, with its market cap rising Rs 1.4 trillion. HCL Tech (up 26.2 per cent) and Infosys (up 15.5 per cent) added Rs 76,226 crore and Rs 62,825 crore, respectively.
Nifty IT stocks in July
What's driving gains in IT stocks?
This tech blitz is a result of three forces converging: valuation re-rating, decent earnings and sector rotation. After the IT index plummeted 34 per cent in the first half of the year amid fears of AI-led revenue deflation, it became the market's cheapest, and "beaten-down quality eventually attracts buyers", said Vaqarjaved Khan, Sr. Analyst – Fundamental, Angel One.
Moreover, steady Q1 FY27 earnings eased fears that AI would gut the services model overnight. JM Financial said that Q1 FY27 earnings turned out to be largely in line or better than expected on lower expectations, while Q2 FY27 commentary suggests a stable demand environment.
Unwinding of AI-related trades in developed markets has also aided this rise.
"For much of this cycle, global money chased AI beneficiaries while Indian IT was seen as the AI victim. As that trade shows signs of unwinding, the "reverse AI trade" is rotating capital back toward under-owned, reasonably-valued services players. A softer global tech tape paradoxically helps Indian IT, because it narrows the valuation gulf and revives the case for consulting-led delivery," said Khan, but cautioned that this is a positioning shift, not a fundamental re-rating.
IT stocks: Tread carefully!
Analysts said the market is pricing in a broad recovery that hasn't yet been confirmed, and it is wise to be cautious.
"It is still difficult to say conclusively if worse is over as management commentaries remain mixed and demand visibility continues to vary across segments. However, IT companies are increasingly leveraging AI-enabled talent and shifting towards outcome-based execution models, which could enhance productivity, improve execution efficiency and support revenue growth," said Sunny Agrawal, head of fundamental research, SBI Securities.
Structural overhangs such as Accenture's guidance cut, mid-cap earnings warnings, and unresolved questions on AI's impact on legacy revenue persist, said Khan, advising a staggered approach. "Favour large-caps with strong deal books and AI-integration credentials over weaker names riding sentiment, and treat this as a multi-quarter accumulation, not a momentum trade," Khan added.
Sumit Pokharna, SVP - fundamental research, Kotak Securities, said the macro environment remains uncertain. "Clients continue to prioritise investments in AI, modernisation, cloud and productivity initiatives while remaining selective in discretionary spending. During renewals, they are demanding higher productivity benefits, leading to higher deflation in base business revenue. During renewals, clients are demanding higher productivity benefits, leading to higher deflation in base business revenue. AI-led deflation is present in both large and small deals," he added.
We expect AI adoption beyond software engineering to accelerate significantly after FY2027. Against this backdrop, he recommends a handful of stocks where valuations are attractive. TCS, Infosys and Tech Mahindra in the large-cap space and Coforge in the mid-cap space are his top picks.
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