This is how you should invest in Indian tech stocks in 2025

medium nocaption116946269When you really deconstruct the major indices (Nifty50 or Sensex), there are a couple of sectors that are dependable. Banking would be one and IT services the other. These are stable and the risk of a huge loss is less probable in these sets of stocks. Increasingly, a more varied set of technology stocks, more youthful and volatile, are available in the markets.Over the past year, the Nifty IT index has returned 25% as compared to 12% for the Nifty 50. In fact, Tata Consultancy Services (TCS) is the one large-cap IT company that has underperformed the IT index at 10%.The Nifty IT index is very sensitive to the rupee-dollar exchange rate. The graph below shows that if the rupee falls by 50%, then it will give a potential rise of 100% for the IT index. medium116909272Fund managers are looking at large IT stocks as value buys for the simple reason that these companies have established managements and tested business models. The falling rupee in an otherwise healthy US economy looks like a big opportunity for software companies in India.But apart from IT services, many new-age companies are getting listed on the stock exchanges. These are not IT services companies but they use the internet to deliver services that are for local consumers.Take, for instance, Zomato, Swiggy and even E2E Networks. Zomato returned 117% in the past year and E2E Networks appreciated almost 5x (480%). And there have been strong indications that quick-commerce (q-commerce) companies Zepto and Flipkart might access the public markets. We expect more tech stocks from various sectors of the technology value chain (data centres, fintech) to list on the Indian markets.A bulk of investments will be in solid and safe IT services stocks at one end of the spectrum, and at the other end will be Zomato, Swiggy and E2E Networks.The latter will be more volatile but will also deliver potentially high returns for some time. PMS (portfolio management services) investors also have investments in US tech stocks such as Nvidia and Microsoft, which is an investor in OpenAI and has the Azure cloud business.The discerning investor would have to adopt a varied investment approach for different stocks. Here is how investors in tech stocks should expect various sub-sectors to behave in 2025.A veteran fund manager says that these new-age internet-based services companies will become the Infosys and TCS of tomorrow. Even if some of them are making losses, it is just a matter of time before they deliver serious and dependable profits.This is how investors should approach various sub-sectors in the Indian technology landscape.IT servicesThe Indian IT services industry had great expectations from 2025. The US Federal Reserve had signalled a slew of rate cuts that would likely result in their banking clients loosening their purse strings. Discretionary spending was expected to return.However, Donald Trump winning the US presidential election has tempered them. The Fed has announced that there will be fewer rate cuts than it had previously planned, impacting client spending calculations. Trump’s plan to impose widespread tariffs would also have second-order effects on IT services. Clients are waiting for clarity on Trump’s policies before planning new spending.Despite that lowering of expectations, 2025 will likely still be better than the previous year, analysts expect.“We expect industry growth to pick up to 6-7% in FY25-26 from 3-4% in the past two years, led by a recovery in the US market. But a weaker outlook for Europe, GenAI uncertainty and headwinds from global capability centres (GCCs) will restrict its upside,” HSBC analysts said in a note. medium116909316GCCs will also take the limelight — if IT companies cannot beat them, they will need to partner with and sell to those businesses. Accenture already has the lead. Earlier last year, it picked up a stake in ANSR, which helps clients set up their technology centres in India.Indian IT companies will start doubling down on ‘build, operate and transfer’ models and focus on selling services to in-house tech units to ensure that they retain a foot in the door with potential clients.“In every other meeting that I have with global investors, I’m asked, ‘Given that IT services companies are investing heavily in dedicated sales and business development teams to go after GCCs, how soon will they get to their first $1bn in revenue from these GCCs?’ The drumbeat of announcements… makes me believe that this will soon be a reality for many, if they are not already there,” said Ramkumar Ramamoorthy, partner at technology consultancy Catalincs and former head of Cognizant India, in a LinkedIn post two months ago.Consumer technologyBlinkit, Instamart and IPO-bound Zepto will continue their march into smaller cities and product categories. While the 10-minute value proposition might not grow in smaller cities the way it has grown in the top 10 cities, the product category expansion will make up for it.Already, smaller form-factor electronic goods such as headphones, hair dryers and low-value mobile phones are being ordered via q-commerce firms. The expansion into things such as refrigerators, TVs will take more time because of third-party seller capital requirements and also FDI (foreign direct investment) regulations. Investors will continue to buy into these companies because all of them are leaders in modern consumer retailing.For marketplaces Flipkart and Amazon, 2025 could be a defining year. The e-commerce market leaders were facing the twin challenges of regulatory headwinds and q-commerce onslaught. This year would see if they could come up with their own instant delivery solutions and defend their turf.The consumer internet space will see increased use of AI this year. The use of AI, which has largely been in customer engagement and marketing, could extend to other aspects of the e-commerce experience. AI adoption would determine the competitive advantage of e-commerce firms.Startup investments and IPOsThe Indian startup ecosystem steps into 2025 with greater confidence, thanks to a slew of positive signals. After two consecutive years of sharp slides, venture funding increased in 2024. The trend should continue through 2025. From two in 2023, the new additions to the unicorn club or startups with a $1bn+ valuation increased to five in 2024. Similarly, the number of profitable unicorns is growing steadily. medium116909339What kept up enthusiasm was the public market’s warm embrace of startups. From five, startup IPOs jumped to 13 — the highest since 2021. This year it will double. About 30 startups have gone public in the past four years. In the best-case scenario, 30 startups would debut on the public markets in 2025.Indian startups saw exits worth $5bn in 2024, according to an ET estimate. IPOs and public markets have contributed nearly three-fourths of these exits. With several large public listings on the cards, exits could be significantly higher in 2025.AI software2025 is set to be the year AI agents take centre stage, introducing SHaaS (software and hardware as a service) and challenging traditional SaaS models. Microsoft CEO Satya Nadella envisions a future where AI agents manage business logic so seamlessly that backend systems become obsolete. Numbers back him. The global AI agent market is projected to grow from $5.29bn in 2024 to $216.8bn by 2035, at a compound annual growth rate (CAGR) of 40.15%. By the end of 2025, AI agents are expected to handle 20% of all customer service requests.Single-agent systems, known for their quick deployment and lower costs, are projected to dominate the market with a 74.34% share by 2035. Meanwhile, multi-agent systems, though growing at 46.76% CAGR, will offer extensive business customisation, catering to more complex needs.What drives the growth? Natural language models — particularly, Large Language Models (LLMs) and Small Language Models (SLMs) — which enable AI to manage complex CRUD (create, read, update, delete) operations with ease. Integrating AI agents with familiar tools like Excel and Word will create more intelligent and efficient workflows.Despite the promising outlook, monetising these innovations remains a challenge. Companies are exploring various models, including ‘build your agent’ frameworks, subscription services, API access fees and integrated AI solutions. However, the market’s readiness for these new models is still evolving.The AI models and tech infrastructure will become far more powerful next year. The question of how India should play — whether we build our own large models or continue to build solutions on top of existing models — would become more crucial given the national importance of AI.The other crucial question would be AI’s impact on India’s promising SaaS landscape. Companies will increasingly have the choice of building software themselves by using AI platforms rather than buying them.AI hardwareValuations of Nvidia, AMD and TSMC are already stretched, and their stock prices may not move up that fast, but the demand for their products like GPU and chip manufacturing will not slow down. There is no clear winner in the LLM stand-off. OpenAI, Llama (Meta), Grok, Anthropic and Google Gemini are all yet to show monetisable business models. This will mean GPU cluster build-out will continue and chip manufacturers will continue to be in demand.