The Nifty IT index’s 2000-point surge in two sessions marks a sharp reversal in sentiment for a sector previously seen as vulnerable to artificial intelligence disruption. The rally is being driven by a global ‘Reverse AI Trade’, where capital is rotating out of expensive US technology names building AI data-centre capacity and into established IT services firms like TCS, Infosys, and HCL Tech.
The pivot stems from mounting concerns over the profitability of AI infrastructure investments. S&P 500 companies are reporting earnings growth above 25%, but free cash flow as a share of reported profit has fallen to about 85% from 90–95% between 2016 and 2023. For the biggest AI spenders—Microsoft, Alphabet, Amazon, and Meta—capital expenditure is draining cash, with hyperscalers’ free-cash-flow ratio near -15%. This gap between reported earnings and cash generation is prompting a reassessment of valuations for pure-play AI infrastructure holdings.
Valuation and flow dynamics
As money exits those crowded trades, it is seeking sectors with stable cash flows and relative value. Indian IT, trading at a P/E of 17.69 versus the Nifty 50’s 19.12, fits that bill. The sector also absorbed domestic institutional buying of Rs 2,439 crore on a day when foreign investors were net sellers, indicating local conviction in the move. Derivatives activity shows significant put writing in IT stocks, and traders covering short positions have amplified the gains.
The rally’s sustainability now depends on two factors. First, the global rotation must hold as AI infrastructure capex continues to pressure cash flows. Second, Indian IT firms must demonstrate that their own AI work—which TCS says now constitutes 10% of revenue—can expand profit margins and offset soft demand in traditional services. If client conversations shift towards AI cost optimisation, the sector could see a durable re-rating from a defensive play to a growth participant.