Welcome to the new guessing game in town, that is, ‘Are IT stocks cheap?’. The debate has been raging the last six months and each time it appears cheap enough, another blow lays it low. A few weeks back it was Accenture’s disappointing outlook that triggered a correction. Last week it was KPIT Technologies’ negative pre-announcement that saw the stock crash around 25 per cent last week.
After a 30 per cent correction in the Nifty IT index over the past year, the sector’s valuation multiples have compressed sharply. On trailing earnings, the index is now around 18 times, a level that looks modest compared with own multi-year averages. On the face of it that sounds like a classic valuation reset.
The more uncomfortable question is whether this reset is complete, or merely halfway through.
Look at the Big Four. TCS, Infosys and Wipro now trade around 14-15 times trailing earnings, while HCL Technologies is slightly higher at 18 times Price-to-Earnings (P/E). These numbers look sober when compared with the post Covid boom excesses (broadly 30-40x).
That phase has clearly ended. TCS’ P/E has more than halved from a peak of about 42 times to around 15. Ditto for Infosys, which has slipped from about 38 times to 15. Wipro has moved from about 32 times to 14. HCLTech, too, is down from its peak (32x).
So, yes, the market has done some cleaning up. The problem is that the cupboard may not yet be fully ship-shape.
This is not a sudden change in stance. bl.portfolio has been cautious on Indian IT for about three years, arguing that the sector’s post-Covid valuation premium was running ahead of earnings reality. In our February 8 edition, after the latest AI scare hit IT stocks, we had noted that investors should not view corrections as a buy-the-dip opportunity in our article titled ‘Lessons for IT investors from AI’s iPhone moment’.
The historical comparison is revealing. TCS, Infosys and Wipro are now below their pre-Covid P/E levels. That gives bulls a decent argument; the froth has gone, businesses remain cash-rich, payout yields are attractive, and any improvement in demand can trigger a sharp rebound.
Bears have an equally simple question: If these companies are no longer growing like premium compounders, why should they be considered cheap?
Inconvenient facts
In our article titled ‘Accenture sets the tone for IT stocks’ (bl.portfolio of April 28, 2024), we had explained why Indian IT stocks’ valuation cannot decouple from valuation of global IT stocks like Accenture.
Today, Accenture, trading at 10x the trailing P/E, becomes the inconvenient global mirror. A gold standard in IT services and consulting globally, its valuation, earnings expectations and demand commentary matter. In the pre-Covid decade, Accenture used to trade at premium to TCS (which, in turn, used to trade at a premium to Infosys, HCL Tech and Wipro). Bear in mind that Accenture has significantly outperformed its peers, clocking a 10 per cent USD EPS CAGR for the FY16-26 period, comfortably outpacing the growth rates of HCL Tech, Infosys and TCS (all 6 per cent CAGR), and Wipro (3 per cent CAGR). Even after factoring for currency benefit, the EPS CAGR for Indian peers at 7-9 per cent CAGR is below Accenture.
While Accenture’s margins are lower than TCS, its larger scale and higher revenue share from high-end business used to garner it a premium over Indian IT. Post Covid, the valuation math has changed. Today, the valuation premium of Wipro, Infosys, TCS and HCL Tech at 39 per cent, 46 per cent, 53 per cent and 84 per cent, respectively, appears unjustifiable. This implies that whenever IT stocks rebound, Accenture is likely to outperform Indian peers.
The basic issue is simpler: Are Indian IT companies expected to grow materially faster than Accenture? For Accenture, one-year forward consensus PAT growth is about 6 per cent. For TCS, Infosys, and Wipro, the corresponding numbers are 8 per cent, 4.7 per cent, and 9.5 per cent aided by currency depreciation. Now, the premium question becomes less emotional and more arithmetic.
The other inconvenient fact is growth. Stocks are cheap when one looks at the information in the rear-view mirror or against their own historical valuation, but are they cheap when one looks at data in front? With the industry in the midst of a once-in-a-generation AI disruption, the future growth rate is entirely unpredictable, making any valuation exercise, for now, largely speculative. While a case can be made on the payout ratios with trailing dividend yield, say, for companies like TCS at 5.2 per cent, there may a situation in future where if companies need to deliver on growth they will have to invest impacting dividends.
In this context, mid-cap IT offers a sharper warning. Even after correction, several names still trade at premium valuations. Persistent, Coforge and Mphasis trade in 30-40x trailing PE band. KPIT Tech’s more than 15 per cent single-day fall on July 1 showed what happens when the market starts questioning the extra-growth story. That stock is still trading near 25x. Others like Tata Elxsi trade at 35x even after a 41 per cent correction over last one year.
Has the market already priced in the pain, or is it merely rediscovering that even great companies need growth to deserve great multiples? That is the $250-billion-dollar (Nifty IT total m-cap) question right now.
Published on July 4, 2026
