It's not a change to the ITA AI that is required here, but a change to both the way the starting OOB's are set-up and the military AI.
It is clear that the ITA OOB is "correct" for 1938-39 - the standard Inf Div consisted of two Inf regiments ("binary" organisation). I say "correct" because the Div also included in an Art regiment. Oddly, given the much heralded introduction of the different brigade types in HOI3 before it was first released, I find it strange that the standard Inf Div set-up for ALL countries in the so-called historical OOB's at the starting points, only ever included Inf Brigades. There is only one exception of note to this - the few "Mixed Brigades" in JAP.
The inclusion of Art Brigades in the ITA and other majors OOB's for 1939 would clearly give ITA an advantage against say Yugoslavia, for example in a straight fight 2 ITA Divs attacking 2 YUG Divs. This is not to say that historically minors had no artillery in their Inf Divs, but that this was more likely to be of smaller numbers and/or using very obsolete equipment, as to not warrant inclusion in minors' OOB's in-game.
This, I think, should improve the AI v AI situation of ITA, without giving it a completely ahistoric advantage over some of it's minor neighbours.
By 1940 IRL ITA had re-organised its Inf Divs, so most also included an MSVN (Blackshirt) Legion, this could be regarded as roughly equivalent to another Inf Brigade in-game. I'm not sure if this is reflected in-game for the ITA OOB's for later starting points, but certainly on a 1939 or earlier start the ITA AI (as with all other countries) is incapable of this sort of re-organisation - it will never add a brigade to an existing Div, always producing new Divs.
The "binary" organisation of the ITA Divs was certainly a RL weakness compared to UK and GER in 1939. This was coupled with "binary" organisation at Corps level as well - most ITA Corps consisted of only two Divs. So in Sept 1940 when ITA invaded Egypt, the 10th Army consisted of 5 Corps, each with 2 weak "binary" Divs. That's a total of 20 Inf Brigades in-game. This RL structure caused problems with command and supply arrangements.
A human player can easily improve on the situation for ITA by re-organising the 10th Army into one Corps consisting of five Inf Divs, each with 4 Inf Brigades (assuming no support brigades). Straightaway this gives an advantage over being able to provide better generals commanding each unit, because you only need 7 generals, instead of the original 16, so you can pick the best ones.
But it gives more advantage than that, even for countries with decent leaders available. By my guess you get anything up to a 25-50% advantage when the AI controls a single 4 brigade Inf Div, compared to two x 2 brigades. IMHO any human player can easily win the game simply by organising units to max out the brigade structure. This is because the whole 4 Brigades act together, defending and moving/attacking as one. Even a very dedicated human micro-manager would be hard-pressed to make sure the two separate 2 brigade units acted closely enough together to come near to the effectiveness of a single 4 brigade unit. But under AI control this never happens.
The AI is quite happy to attack with one of the 2 brigade units, when the other is unable to move after a previous attack, even when it is clear that it needs to use both units to have any hope of success. Even when both are available to attack, it is very likely to split the direction of attack, so instead of both attacking a weak enemy unit in front of them, one attacks a different unit in another province even when that province is being attacked by an already overwhelming odds from elsewhere on the front. Massing brigades together into the largest possible Div units prevents some of this stupidity.
This is because the military AI has no conception of corps/army/group formations. It makes no attempt to assign objectives to higher-level formations, and keep the units belonging to those formations together on the battlefield as a co-ordinated force.
You can see this on some of the later starting point OOB's, where the Divs comprising a Corps are nowhere near each other on the battlefield, and the AI makes no attempt to move them into the same or adjoining provinces.
I do not think the ITA AI is specifically nerfed in any way, and improving the overall AI in the way I mention above, while improving the general game-play, could cause major problems with ITA. IRL in Sept 1940 the ITA 10th Army comprised 10 Divs, although individually weak Divs as mentioned, they still massively outnumbered the defending British forces which comprised only the 4th Indian Inf Div and the 7th Armoured Div. But Gen Graziani commanding the forces in Libya chose to advance only 5 of his Divs, and called a halt while still 80 miles from the main UK defensive positions. He then dug-in to create nine "fortified" camps (so mostly one Regiment per camp) which were not close enough to provide adequate cover for their neighbours. Eventually the British counter-attacked and the camps were fairly easily destroyed one by one, and the British forces then were able to advance into Libya.
Even if you could get the AI to recognise the rather cowardly leadership of the ITA forces, a fairly average human player (as per the OP) looks at this situation and says: "I'm going to group all of those 10 Divs in the 10th Army together into a concerted attack and should be able to sweep away such meagre UK forces. It's a fairly narrow front, so easy to micro-manage. Even a large (3 or 4 brigade) well-led and well-equipped Armoured Div can't withstand an attack on more than one front from that amount of Inf."
An ITA player with some experience also knows that once FRA has fallen through the Vichy events, that there is no need to keep the whole 5th Army in western Libya protecting the border with Tunisia, and some of those units, especially if there are any armoured/MOT, could join the 10th Army's advance into Egypt. It's hardly likely that any human player would call a halt to the advance after capturing only a single province!
There is then one other specific weakness of the game mechanics in North Africa, where a human player could utilise the ITA forces far more effectively than the AI can. Away from the coast there are very low infra provinces which units are unable to move into. While this narrows the front towards Alexandria and helps to favour UK defenders concentrating around El Alamein, it doubly cripples an Axis AI. It sees all of the provinces it controls in Egypt which adjoin UK controlled provinces which it is unable to attack as part of the "front", even though it cannot be attacked from these provinces, and so the AI places units in each of these provinces to defend them. It is this above all, not the lack of the DAK, which usually prevents the ITA AI from succeeding in Egypt. The AI is simply incapable of bringing enough of its forces to bear in a series of well co-ordinated attacks to be able to regularly push the UK forces back into the Nile delta area.