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Indian IT stocks emerge as 'safe AI trade' amid rising Big Tech spending; Anand Rathi prefers TechM, LTM, Mphasis

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In short

Investors are targeting Indian IT services providers as soaring Big Tech capital expenditure challenges cash returns across capital-intensive infrastructure models. Although artificial intelligence-driven pricing deflation poses near-term margin risks, the sector offers robust free cash flow yields of 6.5% for FY28 and 7.2% for FY29. Brokerage Anand Rathi specifically favors Tech Mahindra, LTIMindtree, and Mphasis due to their diversified enterprise operations and substantial deal pipelines.

Key points

  • Valuation metrics for the top six domestic IT companies sit at 16 times estimated FY28 ea…: Valuation metrics for the top six domestic IT companies sit at 16 times estimated FY28 earnings.
  • Asset-light services firms present defensive value through high cash yields despite low-s…: Asset-light services firms present defensive value through high cash yields despite low-single-digit revenue expansion.
  • Diversified vendors with proven execution and deal momentum remain preferred vehicles for…: Diversified vendors with proven execution and deal momentum remain preferred vehicles for expanding enterprise AI monetization.

Sources checked by our analysis pipeline: 1

Domestic brokerage firm Anand Rathi believes Indian IT companies could emerge as beneficiaries of the rising capital expenditure burden on global technology giants, as investors increasingly favour asset-light businesses with strong free cash flow (FCF) generation. The brokerage sees attractive risk-reward opportunities in Indian IT stocks, with Tech Mahindra, LTIMindtree, and Mphasis among its top picks.

In its latest report, the brokerage said the AI infrastructure buildout was becoming increasingly capital-intensive amid accelerating demand. While concerns initially centred on leveraged AI infrastructure providers such as CoreWeave, with its credit default swap (CDS) spreads rising to around 1,100 basis points against a one-year average of approximately 670 basis points, financial pressures are now becoming relevant for hyperscalers as well.

The brokerage highlighted that Microsoft was the only major hyperscaler to report positive free cash flow in Q3CY26, while its peers continued to face pressure. However, AWS, Azure, and Google Cloud recorded year-on-year growth of around 39%, 48%, and 103%, respectively, with aggregate cloud backlogs exceeding $1.8 trillion.

According to Anand Rathi, this divergence highlights robust AI demand, even as converting growth…

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