FII allocation in technology hits all-time low of 7.3% in Q1 CY26; DIIs hold firm at 8%

Foreign institutional investors (FIIs) have sharply reduced their exposure to the technology sector, with allocation falling to an all-time low of 7.3% in Nifty-500 companies in the March quarter of 2026, according to a report by Motilal Oswal Financial Services.

The report noted that FII allocation to the technology sector declined by 90 basis points sequentially and 280 basis points year-on-year to 7.3% in March 2026, reflecting sustained selling pressure in the space. In contrast, domestic institutional investors (DIIs) remained overweight on technology, with the sector accounting for around 8% of their total allocation.

In Q1 CY26, DIIs invested $27.2 billion in Indian equities, supported by a steady SIP inflow trend. FII flows, however, remained volatile—turning positive in February 2026 with inflows of around $1.7 billion before reversing sharply. The escalation of the Iran war triggered heavy selling of $14.2 billion in March, taking total FII outflows for the quarter to $15.8 billion.

As a result, FII ownership in the Nifty-500 dropped to a record low of 17.1%, while DII holdings climbed to an all-time high of 20.9%, underscoring a continued structural shift in institutional ownership.

“Once the war dust settles, there is a high likelihood of a better FII flow environment, and even an abatement in outflows will be taken positively by the market, while a full-blown positive flow can lead to sharper rallies,” the report said.

On a year-to-date basis, the benchmark BSE Sensex has declined over 9%, while the Nifty 50 is down around 8%.

Within the Nifty 500 universe, FIIs reduced their holdings across 17 of the 24 sectors. Their highest exposure remained in private banks at 38.8%, followed by telecom (23.7%), real estate (18.1%), automobiles (18.1%), consumer durables (17.8%), healthcare (17.6%), oil & gas (16.9%), technology (16.5%), and NBFC-lending (15.5%).

Meanwhile, DIIs continued to strengthen their presence across key sectors. Their highest exposure was also in private banks at 37.3%, followed by consumer (24.3%), technology (22.3%), oil & gas (21.7%), and telecom (21.7%).

60% of Nifty IT stocks below long-term range

According to a separate report by DSP Mutual Fund, nearly 60% of the Nifty IT Index (by market capitalisation) is currently trading below the 33rd percentile of its historical valuation range, even as return ratios and cash generation remain strong. The sector’s weight in the Nifty 50 is also near multi-year lows amid uncertainty around the pace of AI-led disruption and ongoing geopolitical tensions.

Large IT companies delivering return on invested capital (ROIC) of over 45% and maintaining strong balance sheets are now trading at around 17.5x trailing earnings—levels that, in several cases, are close to or even below those seen after the 2008 global financial crisis.

This trend is evident among index heavyweights Infosys and Tata Consultancy Services , which together account for nearly half of the index. Infosys, with a 29.2% weight, is trading at the 23rd percentile of its valuation range with a P/E of 17.6, supported by a 29% return on equity (ROE) and a 6% free cash flow yield. TCS appears even more attractively valued, sitting at the 6th percentile with a P/E of 16.7, while delivering a sector-leading ROE of 52% and steady cash flows.

In contrast, some mid-tier IT firms continue to trade at a premium. Tech Mahindra  and Persistent Systems are positioned at the higher end of their valuation ranges, with percentiles of 82% and 79%, respectively. Persistent, in particular, stands out with a high P/E of 43 and a relatively low free cash flow yield of 1%, indicating that future growth expectations are already priced in. Coforge shows a similar trend, with elevated valuations and comparatively modest cash flow yields.

Some companies present a more balanced profile. HCL Technologies  trades at a P/E of 21.6 with a healthy 6% free cash flow yield, while LTIMindtree remains supported by strong cash reserves, with cash accounting for about 11% of its market capitalisation.

Meanwhile, Wipro  stands out as a relative value pick, trading at the 15th percentile with a P/E of 15.2. It also offers the highest free cash flow yield at 8%, backed by a strong balance sheet, with cash making up nearly 29% of its market capitalisation, although its return ratios remain lower than peers.

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