Best FII bets: 3 AI-linked stocks and up to 250% rally in Q1. Have investors missed the bus?

Since the September 2024 market peak, FIIs have remained persistent net sellers, with cumulative outflows of nearly $60 billion, including almost $30 billion in 2026.

But shareholding data for the first quarter suggests that while a broad-based return to Indian equities remains uncertain, foreign investors are becoming increasingly selective in where they put their money.

Three bets, in particular, have paid off handsomely, helping FIIs kick off FY27 on a strong note. Data from Prime Infobase shows that FII exposure to HFCL more than doubled, with their stake rising to over 15% from 7% in Q4. Over the same period, the stock jumped a staggering 214%.


In Sterlite Tech, FII holding increased by 6.75 percentage points to 18.22%, while the stock soared 248% in three months. In MTAR Tech, foreign investors raised their holding by 7.49 percentage points to 23.80%, and the stock climbed a whopping 120% over the same period.

Foreign investors’ rotation out of India’s large-cap bellwethers and into mid- and small-cap stocks may have further to run as global funds hunt for companies whose earnings can potentially double or triple, according to Rajat Rajgarhia, Managing Director and CEO–Institutional Equities at Motilal Oswal Financial Services.

Also read: Holy trinity! Promoters, FIIs and mutual funds raised stakes in these 9 stocks; 3 turned multibaggers

More than 80% of active global emerging-market funds are underweight India. If those funds simply restore their allocations to neutral, the shift could generate around $25 billion of inflows, HSBC strategists Prerna Garg, Herald van der Linde and Yogesh Aggarwal said in a report.

HFCL’s powerful surge

The sharp increase in foreign ownership comes as India’s data centre industry enters a multi-year growth cycle, supported by accelerating digitalisation, increasing cloud adoption and rising demand for artificial intelligence infrastructure.

According to international brokerage Nomura, India’s data centre IT load has expanded from around 350 MW in 2019 to nearly 1.5-1.6 GW in 2025, translating into a CAGR of about 29%, compared with roughly 20% globally.

HFCL has revised its FY27 revenue growth estimate to 40%. Its board has also approved an investment of Rs 215 crore to build a manufacturing facility for advanced AI data centre connectivity solutions.

The bull case for HFCL, however, extends beyond optical fibre and data centres. Deven Choksey Research sees another 53% upside potential, calling defence and aerospace the “X-factor” that changes the entire investment thesis for the stock. The brokerage initiated coverage on HFCL with a 'Buy' rating and a target price of Rs 362 apiece earlier this week.

HFCL has consolidated its defence assets under HFCL Advance Systems (HASPL), integrating aerostructure manufacturing, including the acquired business with more than Rs 2,000 crore in export orders, radar or surveillance systems through Raddef, and thermal weapon sights into a single scalable entity.

An ammunition manufacturing facility is being established in Andhra Pradesh for electronic fuzes, multi-mode hand grenades, for which there are only 3 licensees in India, and 155 mm artillery shells.

“We believe defence revenue trajectory to be Rs 77 crore (FY26) to Rs 400 crore (FY27) to Rs 1,200 crore (FY28) to Rs 5,000 crore (FY29), at 25%+ EBITDA margins. Critically, defence customers provide advance payments, dramatically improving working capital dynamics compared to the legacy EPC business,” Deven Choksey said.

Read more: ₹49 lakh crore market-cap wipeout! Are Nifty’s fallen giants bargains or value traps?

Reasons behind Sterlite Tech’s rally

Last month, international brokerage CLSA upgraded the stock to Outperform and assigned a target price of Rs 950 implying an upside of 37% from current market levels. The brokerage said Sterlite Technologies' order book surged 155% QoQ to Rs 18,600 crore, pointing to a strong growth outlook.

Sterlite Technologies reported its strongest quarterly performance in Q1FY27, helped by higher demand for optical connectivity products, growth in its data centre business and a record order book linked to AI-ready digital infrastructure.

The surge in foreign ownership comes at a time when India’s data centre industry is entering what could be a multi-year expansion phase. Rapid digitalisation, growing cloud adoption and the rising infrastructure needs of artificial intelligence are driving demand for data centres and, in turn, optical fibre connectivity.

MTAR Tech’ bragging rights

The company has reiterated its FY27 guidance of 80% revenue growth and EBITDA margins of 24% (±100bp). Management targets 4-5x asset turn on incremental capex (INR5b by FY28 and 70% for fuel cell). The company is commissioning Fuel Cell Phase-2 expansion by Sep-Oct'26 and a multi-fold Phase-3 expansion by Mar'27. Management stated that all current orders will be executed in three years.

Motilal Oswal says the company has a strong order book of Rs 51.4b as of Jun’26, driven by a healthy pipeline across the clean energy (fuel cells), A&D, nuclear sectors, and products & others. Further, commercialization of new products and onboarding of new clients across all segments will drive further growth. We anticipate these initiatives to translate into strong growth and margin expansion, led by operating leverage, as guided by the management.

Further, drastic improvement in working capital to 59 days (vs. 172 in FY26, guidance for FY27 is 100 days) strengthens cash flows and balance sheet quality.

With strong order book growth across segments, ongoing fuel-cell capacity expansion, robust nuclear opportunities, expected doubling of aerospace revenue in FY27, and growing contribution from product solutions & data centre infrastructure, we believe MTAR is well positioned to achieve growth across all segments, says Motilal Oswal with a Buy rating and a target price of Rs 7,550 (10% upside) per share.

FIIs may still be pulling billions out of Indian equities, but their bets are far from disappearing. They are simply becoming more selective. HFCL, Sterlite Tech and MTAR Tech show where that money is finding conviction, with sharp increases in foreign ownership coming alongside explosive stock gains.

The bigger question now is whether this is the early stage of a broader rotation into India’s mid and smallcap winners, or simply a handful of high-conviction bets in an otherwise cautious FII market.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)