Indian IT companies are positioning for a potential sector comeback in 2026, driven by a dramatic transformation in their artificial intelligence approach and strategic acquisitions worth billions of dollars. Recent developments suggest the sector may finally demonstrate meaningful progress in AI integration, potentially triggering a broader market recovery.

Dramatic AI Focus Transformation

A comprehensive analysis of earnings call transcripts reveals the extent of this transformation across major Indian IT firms, with some companies showing exponential growth in AI-focused discussions over a two-year period.

The transformation is particularly striking for Infosys, which increased AI references from just 4 times in October 2023 to 111 times in October 2025. HCLTech showed similar momentum, jumping from 13 mentions to 130 mentions over the same period, as management discussed building AI-platform revenue streams and leveraging AI as a productivity engine.

Strategic AI Acquisitions Signal Sector Pivot

The sector's strategic transformation extends beyond rhetoric to substantial financial commitments, with recent acquisitions totaling $3 billion demonstrating serious intent to capture AI market opportunities.

Coforge's acquisition of US-based AI firm Encora represents the most significant deal, with management projecting the combined entity will generate $2 billion in revenue by FY27. TCS's $700 million acquisition of Coastal Cloud demonstrates focus on specialized AI capabilities in multicloud Salesforce consulting.

Market Recovery Indicators

Two significant developments in the IT space suggest positive momentum building for 2026. The sector's AI transformation coincides with broader market dynamics, as the Nifty IT index recovered 12.50% in the final quarter, following earlier underperformance compared to global technology indices.

Analysts believe that if IT stocks make a meaningful comeback, the broader Nifty could benefit significantly, given the sector's substantial weightage in the index. The timing of AI integration efforts aligns with increased investor confidence in the sector's strategic repositioning.

Expert Analysis on Sector Outlook

Market analysts view this transformation as a necessary evolution for Indian IT firms. Ravi Menon, IT Services Analyst at Macquarie Capital, suggests enterprises will increasingly choose to build rather than buy AI capabilities due to unique requirements.

"I do believe that enterprises this time will choose to build rather than buy because each company will have its own unique use of AI. That's how I think people will try to differentiate," Menon explained. He expects larger firms like TCS to pursue programmatic acquisitions while midcap companies focus on smaller, strategic deals.

Prashanth Kaddi, Partner at Deloitte India, remains optimistic about continued deal activity, noting that acquisitions of AI services firms globally provide access to both client bases and AI solutions for existing customers.

Strategic Transformation Impact

The data reveals AI has evolved from a peripheral topic to a central theme woven throughout discussions of deal wins, productivity improvements, pricing strategies, and margin enhancement. This represents a fundamental shift from the sector's traditional reliance on scale and labor arbitrage toward AI-integrated service delivery models.

Analysts have identified 9 key stocks to monitor as the sector navigates this transformation, though success will depend on how effectively these companies integrate AI capabilities into their core business models and demonstrate tangible value to clients seeking AI-powered solutions.

Market expert Rajat Sharma, Founder & CEO of Sana Securities, anticipates a significant shift in sectoral leadership as India heads toward 2026. After an extended period of narrow market movement where metals, auto stocks, PSU banks, and financial services dominated returns, investor attention is gradually rotating toward previously underperforming segments, particularly information technology and platform-driven businesses.

IT Sector Fundamentals Remain Strong Despite Sentiment Challenges

Sharma has recently increased exposure to the IT sector, attributing its weak performance primarily to sentiment-driven concerns rather than fundamental issues. The negative narrative stems from US-related developments, including tariff discussions and repeated mentions of higher H-1B visa fees, which do not directly impact the services business model.

The sector's fundamentals present a compelling case for recovery:

Large IT companies such as Infosys and TCS derive substantial portions of their revenues from the US market. Additionally, revenues from other geographies remain largely US dollar-denominated, making currency movements crucial for earnings performance. A strengthening dollar historically provides favorable conditions for Indian IT companies, given their US currency earnings exposure.

Strategic Investment Approach Across Market Caps

Sharma advocates for a balanced investment strategy within the IT sector, spanning both large-cap and select small-cap stocks. Among large-cap options, Infosys emerges as a preferred pick, currently trading at levels where its dividend yield exceeds 2.20%, providing downside protection. The company's robust cash position offers flexibility for acquisitions and investments as it adapts to artificial intelligence-driven changes in technology spending.

According to Sharma's analysis, even a partial re-rating to historical multiples could generate approximately 20.00% upside from current levels. This potential return, combined with the defensive dividend yield, creates an attractive risk-reward proposition.

Midcap Opportunities in Next-Generation Solutions

Beyond established players, Sharma focuses on midcap IT companies developing next-generation products. Intellect Design Arena stands out for its efforts to redefine core banking technology ecosystems. Traditional platforms like Finacle operate on older architectures that complicate integration with modern artificial intelligence tools.

Intellect's eMACH product aims to create a modern, AI-ready core banking system capable of:

• Capturing customer data more efficiently
• Enabling deeper analytical insights for banks
• Supporting seamless AI tool integration

Despite trading at multiples of 45-50, Sharma considers these valuations reasonable for a technology company with strong growth potential, particularly given recent global order wins including deals with overseas banks.

Fintech Platform Evolution and Distribution Strength

Sharma maintains optimism about select fintech and platform companies, especially those with strong distribution networks. Paytm exemplifies this evolution, having re-integrated its payments ecosystem through multiple banking APIs. The company's revenue profile has shifted significantly, with growing contributions from third-party product sales, including credit cards and loan disbursements.

Sharma believes future financial services leadership will belong to players with extensive distribution networks, regardless of their classification as banks, NBFCs, or fintechs. This perspective supports his positive outlook on Paytm's prospects, particularly for investors with higher risk tolerance.

Market Leadership Expansion Outlook

The broader market context suggests conditions are aligning for sectoral rotation. With IT stocks trading at subdued multiples, artificial intelligence driving new investment cycles, and fintech platforms gaining operational traction, previously lagging sectors may regain favor as 2026 approaches. Sharma expects market leadership to broaden as valuations stabilize and earnings visibility improves, creating opportunities across technology and platform-driven businesses that have underperformed in recent periods.