Mumbai: Valuations of Indian IT stocks have fallen to their cheapest levels since July 2020 after the recent selloff, opening up an opportunity for gradual accumulation over the next two years, said fund managers.
The Nifty IT index is currently trading at a price-to-earnings multiple of 20.6 times, well below its five-year average of 29.16 and ten-year average of 24.4, making it the lowest valuation for the sector since the post-Covid period of July 2020.
"The Indian IT sector is passing through a phase of weak sentiment, slower growth expectation, valuation compression, sell-off by foreign investors and reduced index weight," says Parth Shah, product manager and market strategist, DSP Mutual Fund.
Investors have baulked at software services companies recently amid concerns over the fallout of AI advancements on the software services sector. The eruption of the West Asia conflict in the past month shifted the spotlight from the debate over the sector's prospects, but concerns linger in the background. In 2026, the Nifty IT index shed 2.4% compared with the Nifty's losses of 14.5%, but over longer periods, the sector benchmark has seen sharper cuts.
Since October 1, 2024 the Nifty IT index has lost 31.5% compared with the 13.4% dip in the Nifty. Over the last one year it, has lost 19.2%, compared with the 3.6% decline in broad Nifty 50 loss of 3.6%,
The diminished appetite for these stocks has reduced the sector's weight in the Nifty to an all-time low of 8.85%, underscoring the extent of the risk-off mood in technology shares. The peak of the IT sector weight was 19.8% in January 2022.
The extreme pessimism may be flashing an opportunity for value buyers.
"Though AI is a structural tailwind, the revenue model is evolving and the total addressable market (TAM) is expanding, and the deal momentum is improving," says Manish Bhandari, CEO and Portfolio Mamager of Vallum Capital Advisors. Following the drop, the Nifty IT index offers a dividend yield of 3.5%, an earnings yield of 5%, giving investors an opportunity to take exposure to the sector, he said.
A study by DSP Mutual Fund shows that on a rolling three-year basis, Indian IT stocks have underperformed the Nasdaq by 57%.
Investors need to rush to buy these stocks, though.
"Investors wanting to allocate to IT must use a balanced investment approach combining a lump sum allocation now and a staggered approach using SIP," said Shah.
Curated by Emma Watson
