Good Time To Choose Indian IT Firms Over US Tech, Says DSP MF Report

Since mid-2023, when the AI frenzy began, the US tech-heavy index has consistently outperformed India’s Nifty IT. Currently, the Nifty IT Index is at its relative price and rolling three-year performance lows versus the Nasdaq. 

At present, both the AI-led rally in US technology stocks and the pessimism around Indian IT appear euphoric.

According to the DSP Mutual Fund Monthly Report, the Nasdaq, driven by a narrow cohort of large technology companies, now carries its highest weight in global equity markets. In contrast, Indian IT is at its lowest weight within the Nifty as well as in global indices. 

The contrast is clear.

“US tech appears overbought, overowned and overvalued, while Indian IT is underowned, oversold and underperforming, and not yet undervalued, possibly closer to fair value,” says the report.

While it is impossible to determine whether this phase marks a trough or whether further downside lies ahead for Indian IT, the current set-up, according to the mutual fund house, makes a strong case for considering the opposite trade, that is, choosing Indian IT companies over US technology stocks.

Meaningful Derating Despite Strong Long-Term Track Record

Amid a sectoral slowdown, persistent negative news flow and an uncertain outlook, Indian large-cap IT stocks have significantly derated. 

While the Nifty IT TRI and earnings per share have compounded at around 12.50 per cent annually over the past two decades, the index has underperformed the Nifty over the last 3-5 years, says the report.

According to the DSP Mutual Fund Report, this prolonged underperformance has pushed IT’s weight in the Nifty to all-time lows. This has occurred despite leading firms continuing to generate return on invested capital above 40 per cent. If valuations fall further, the sector may offer relative outperformance compared to the broader market, the report adds.

This, however, does not indicate that Indian IT stocks are positioned to deliver strong absolute returns. However, relative to other segments of the market, they may emerge as a comparatively better investment avenue, says the report. 

“The defensive bucket comprising IT, banks and a few other large-cap stocks can be used to navigate periods of heightened market volatility,” the report adds.

Select IT Majors Corrected, Valuations Normalised

As the global IT landscape appears overheated, Indian IT companies seem relatively better positioned. According to the report, several large-cap IT stocks have corrected meaningfully over the past three years, even as their underlying fundamentals have remained largely intact.

Return on equity for many firms is currently at or above long-term averages, while valuations have reverted closer to historical norms. 

“For industry leaders, such as Infosys and TCS, earnings growth over the past three years has exceeded the shareholder returns delivered during the same period,” says the report. This divergence points to a significant de-rating in valuations rather than a deterioration in business performance.

Absence of AI Froth, Yet Strong Deal Pipelines

This valuation disconnect largely stems from the absence of visible “AI froth” in Indian IT majors. According to the report, unlike global peers, Indian IT companies have seen frothy valuations being removed, even as they continue to play a key role as enablers of generative AI.

Indian IT firms have maintained strong total contract value (TCV) pipelines, positioning themselves as execution partners in AI adoption rather than beneficiaries of speculative valuation expansion. As a result, while US tech has been rewarded aggressively for AI narratives, Indian IT has remained largely excluded from the enthusiasm.

The IT sector could become an absolute opportunity if prices correct further and a clearer margin of safety emerges. For now, according to the report, Indian IT remains a relative investment play, standing in sharp contrast to the crowded and euphoric positioning seen in US technology stocks.