India Information Technology Monthly: A Structural Shift from Services to Hardware and Infrastructure

Bottom Line

In February 2026, the Indian information technology sector witnessed the beginning of a clear structural shift, where investment and policy focus moved away from traditional IT services towards hardware-centric domains such as semiconductor manufacturing, AI infrastructure, and data centers. Investors must immediately realign their portfolios to this new reality. This entails reducing exposure to traditional outsourcing stocks while strategically increasing positions in firms with AI-enabled expertise, companies linked to the semiconductor value chain (design, manufacturing, materials, packaging), and those involved in data infrastructure construction.

Month in Review

February proved to be a historic turning point for the Indian IT sector, initiated by provisions in the Union Budget 2026 such as the Semiconductor Mission 2.0 and long-term tax exemptions for data centers. This policy push translated into concrete investment and action throughout the month, culminating in the groundbreaking of HCL-Foxconn's semiconductor unit in Uttar Pradesh, Micron's announcement of commercial production, and Reliance and Adani's unprecedented $210 billion investment pledge in AI infrastructure. The narrative for the entire month was one of two parallel and opposing movements: on one hand, robust bullish enthusiasm for building the new hardware and infrastructure ecosystem, and on the other, concern over increasing structural pressure on traditional IT service business models due to global AI advancements. Heavy selling of IT shares worth ₹10,956 crore by Foreign Portfolio Investors (FPIs) made this anxiety clear. Consequently, a clear divide emerged within the sector, where the valuation of 'Old India IT' is facing pressure, while 'New India Tech' (hardware, semiconductors, AI infrastructure) is attracting massive capital inflows and policy support.

Trajectory Analysis

Month-over-Month Change: February was significantly better compared to January 2026, as the sector moved beyond the policy approval stage into the phase of actual investment and production commencement. Budget announcements laid the foundation for confidence, while concrete inaugurations and investment pledges by month-end accelerated this confidence. However, FPI selling underscored the need for selectivity within the sector, but the overall trajectory remains clearly bullish towards hardware and infrastructure.

Key Developments

1. Budget 2026: India Semiconductor Mission 2.0 and Data Center Tax Exemption Announcement (Week 1) — The Union Budget's announcement of ISM 2.0, with an investment of ₹1.6 lakh crore, provided a roadmap to strengthen semiconductor design, manufacturing, and supply chain. Additionally, a provision for long-term tax exemption until 2047 was made for foreign companies establishing data centers and AI infrastructure. Portfolio implication: This policy framework is the foundation for a multi-year growth cycle. Investors should build core long-term positions in semiconductor plays like Tata Electronics, Kaynes Technology, Dixon Technologies, and data center real estate/infrastructure companies.

2. Heavy Decline in Traditional IT Stocks Due to Anthropic's New AI Tools (Week 1) — Indian IT stocks saw sharp selling following the launch of new tools by global AI firm Anthropic, leading to a 6% decline in the Nifty IT Index and a reduction of approximately ₹2 lakh crore in the sector's market capitalization. Portfolio implication: This event signals a structural challenge for the traditional IT outsourcing business model. Exposure to traditional firms like Infosys, TCS, Wipro, HCL Tech should be reduced until they clearly demonstrate their AI capabilities and strategy.

3. Groundbreaking of HCL-Foxconn's ₹3,700 Crore Semiconductor Unit and Micron's Commercial Production Announcement (Week 3) — The foundation stone was laid for North India's first Outsourced Semiconductor Assembly and Test (OSAT) facility in Uttar Pradesh. Concurrently, Micron announced the start of commercial chip production in India by the end of February. Portfolio implication: These events symbolize India's transition from the 'pilot' to the 'commercial' phase in semiconductor manufacturing. Investors should focus on publicly listed players linked to its back-end (packaging & testing), as well as Micron's local suppliers, as initial revenue flows are likely to commence from 2026-27.

4. Reliance and Adani's $210 Billion Investment Pledge for AI-Ready Data Infrastructure (Week 3) — Both conglomerates committed to this massive investment to bolster cloud computing capabilities across India. Portfolio implication: This ensures a large, multi-year order pipeline for companies involved in building data center infrastructure (power management, cooling systems, networking, real estate). Investors should increase positions in mid-cap engineering and equipment manufacturing companies specializing in these sub-sectors.

5. FPI Selling of ₹10,956 Crore from IT Shares in First 15 Days of February (Week 3) — Foreign Portfolio Investors executed this heavy exit due to concerns over the disruptive impact of AI technology on the sector. Portfolio implication: This indicates continued short-term valuation pressure for traditional IT service stocks. Investors should use this selling as an opportunity to enter AI-first firms and those with business models involving semiconductor/hardware exposure, as their shares have maintained relative strength.

6. India Joins US-Led 'Pax Silica' Alliance (Week 3) — India announced its participation in this alliance aimed at securing global supply chains for semiconductors, AI, and critical minerals. Portfolio implication: This move establishes India as a reliable partner in China-alternative supply chains. Indian semiconductor design and software firms with deep ties to US technology companies will benefit from long-term contract security and technical collaboration.

7. 10 Semiconductor Plants Approved, 4 Commence Pilot Production (Week 1) — The government approved 10 semiconductor units, of which four (by Micron, CG Power, Kaynes, Tata Electronics) have reached the pilot production stage. Portfolio implication: Immediate focus should be on public companies linked to the units that have commenced pilot production. This progress will form the basis for valuation re-rating in upcoming quarters.

Risk Evolution

Risks That Materialized: The risk of AI's disruptive impact on traditional IT service models existed at the start of the month. This risk materialized clearly in the form of Anthropic's tool launch and subsequent heavy FPI selling, leading to valuation declines within the sector.

New Emerging Risks: No significant new risks emerged. Rather, changes were observed in the nature and intensity of existing risks (disruption, execution). However, execution and overcapacity risks related to the massive investments announced by private conglomerates could emerge in the future but did not clearly surface in February.

Sector Pulse (Monthly)

Outlook: Next Month

Key catalysts to watch:

• Formal commencement of commercial chip production by Micron in India and subsequent revenue and supply chain updates.
• Release of detailed guidelines/eligibility criteria for the ISM 2.0 and data center tax exemptions announced in Budget 2026.
• Quarterly earnings due at the end of March 2026, which will reveal the impact of the AI transition on margins of traditional IT firms and initial revenue from pilot projects of semiconductor/hardware firms.

Positioning recommendation: Investors should continue betting on the hardware and infrastructure theme in March as well. Increase positions in the semiconductor value chain (especially OSAT, design, and materials). Associated supplier shares are likely to rally following Micron's production start announcement. Additionally, selective buying in high-quality traditional IT stocks can be considered during the ongoing FPI selling, but only in firms that clearly articulate their AI strategy and client stability.