Bear or Bubble: Why Tech Stocks Remain Expensive Despite Market Downturn
The Nifty IT index has entered a bear market, dropping more than 20% from the peak it touched on Dec. 13, 2024. Yet despite the selloff, most of the companies in the basket continue to command valuations above the sector’s own multiple.
Key Players in the Nifty IT Index
Names such as Infosys, HCL Technologies and Wipro have logged declines between 20% and 25%. These companies are among the largest and most well-established players in the Indian IT sector, and their performance has a significant impact on the overall index.
Global Headwinds and Their Impact on IT Stocks
IT stocks have been under pressure this year as global headwinds piled up. Concerns over US tariff policies under Donald Trump and his push against outsourcing software services have dampened investor sentiment and earnings across several companies have disappointed in recent quarters, reinforcing the view that demand recovery may take longer.
The tightening of H-1B visa rules, including the new $100,000 fee, has added to the strain, with TCS emerging as the largest recipient of such visas last year. This has raised concerns about the ability of Indian IT companies to recruit and retain top talent, which could have a negative impact on their competitiveness and profitability.
Analyst Insights and Market Outlook
Analysts point to slowing large-deal wins, weak client spending in key markets and a cautious growth outlook from management commentary. According to Vipin Kumar, AVP of Equity Research at Globe Capital Market, “Negative sentiment and a perception of unpredictability surrounding US policies are influencing current valuations.”
Despite the IT index’s slump, the current price-to-earnings ratios for six of the 10 constituents stand higher than the Nifty IT average of 25.48, according to Bloomberg data. Stocks such as Coforge and Persistent Systems trade at more than double the index level.
“Premium valuations in frontline names like TCS and Infosys aren’t purely about near-term earnings,” Kumar said. “They reflect balance sheet and cash flows strength.” This suggests that investors are looking beyond the current market downturn and are focusing on the long-term potential of these companies.
Valuation Trends and Future Outlook
The valuations, however, are lower than they were in December 2024, and all companies except Mphasis now trade below their five-year averages, Bloomberg data showed. This could indicate that the market is starting to correct itself and that valuations may return to more reasonable levels.
Kumar noted that many large-cap IT firms are already priced below their long-term median multiples. “Given FY26 demand, outlook remains muted but investment with a longer time horizon, beyond a year or so, is recommended to benefit from the sector’s underlying strength and potential recovery,” he said.
Possible Re-Rating Triggers and Risks
Forward estimates from Bloomberg show P/E ratios are expected to ease further. Possible re-rating triggers include policy clarity and stronger deal momentum. According to Kumar, “Any easing of H-1B visa issue, positive outcome of trade negotiations with US along with improved geopolitical situation would boost investor sentiment. Any visible uptick in large-deals or cloud/AI-led transformation projects would also re-rate the space.”
However, Kumar also warned of risks. “If fears of a US recession resurface or an increase in deal cancellations emerges, we could see a further decrease in valuations, particularly for mid-tier companies,” he said.
Relative Strength Index Readings and Oversold Territory
Relative strength index readings show only Tata Consultancy Services has entered oversold territory, with a score of 30. Most other IT stocks, despite heavy declines, remain above the threshold. This suggests that while the market is experiencing a correction, it is not yet at a point where it is severely oversold.
For Indian investors, this means that there are still opportunities to invest in the IT sector, but it is essential to be cautious and to focus on companies with strong fundamentals and a long-term growth potential. It is also crucial to keep an eye on global trends and policy developments, as these can have a significant impact on the performance of IT stocks.
Conclusion
In conclusion, the Nifty IT index has entered a bear market, but most companies continue to command valuations above the sector’s own multiple. While there are risks and challenges facing the sector, there are also opportunities for investors who are willing to take a long-term view and to focus on companies with strong fundamentals and growth potential.
As the market continues to evolve, it is essential for investors to stay informed and to keep an eye on the latest developments and trends. By doing so, they can make informed investment decisions and navigate the challenges and opportunities of the Indian IT sector.
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