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IT Stocks Face Deep Dive: Valuations Still High
2 Jul
Summary
- Morgan Stanley warns IT stocks may see further price drops.
- Indian IT stocks trade at a 90% premium to global peers.
- Anemic growth prospects hinder a compelling buy case for IT.
Morgan Stanley has cautioned that the current derating of Indian large-cap IT stocks is unlikely to conclude soon. These stocks previously bottomed out at a price-to-earnings multiple of 11 to 13 times, indicating potential for further decline from present levels. The Nifty IT index has experienced a significant drop of 31% between January and June of 2026, a downturn not seen to this extent since 2001.
Despite corrections of 30% to 35% for most large IT firms, their valuations, averaging 13 times estimated FY28 earnings, are still below their historical 10-year average of 15 to 20 times. However, Indian IT stocks maintain a considerable premium over global peers, trading at approximately 90% higher multiples than companies like Accenture and Capgemini, which trade at around 8 times forward earnings.
The primary driver for this downturn is subdued growth. Financial Year 2027 is projected to be the fourth consecutive year of weak growth for the sector. KPIT Tech has already signaled a potential US Dollar revenue decline of 1% for Q1, with Q2 expected to be similar. Analysts also anticipate Infosys may lower its revenue guidance due to slow organic demand.
Key factors influencing the sector include the impact of discretionary spending, the severity of AI-led deflation, the emergence of new AI-driven revenue streams, investment intensity in AI capabilities, and cost-efficiency programs. Headcount trends are also expected to remain muted across the industry.
