Nifty IT Is Facing A Double Whammy | Open Interest

India's IT sector is facing a double whammy: price-to-earnings derating and profits downgrade.

These two factors are driving stock prices lower to the long-term average price-to-earnings band of 22–24 times. India's IT sector revenues have slowed down to 5% in dollar terms during the fiscal ending this March, according to industry body Nasscom. If the pain persists for another two quarters, the growth for the industry will be even lower in the next fiscal.

Let’s look at these one at a time. The tech gauge has corrected from its forward P/E of 37 times, which it hit in December 2024. Since then, the P/E has fallen to 24.6 times forward earnings. The last time Nifty IT hit a high P/E of 37 times was in April 2022. Since then, the index corrected, and the P/E bottomed out at 20 times in April 2023.

The earnings for the Nifty IT companies have been downgraded for the next two years. Nifty IT earnings per share for the current fiscal, which was projected to be at Rs 1,608 at the beginning of January 2023, has now been downgraded to Rs 1,472. For the financial year ending March 2026, EPS for the tech index was projected at Rs 1,900 in January 2023, but this has been downgraded to Rs 1,679. For FY27, the EPS was projected at Rs 2,105, and the street has downgraded this to Rs 1,860. The forward EPS for FY26 and FY27 has been downgraded by 11.7%.

The tech sector is faced with an over 20% price derating and over 11% earnings downgrade. This has resulted in software companies losing nearly $110 billion (Rs 9.5 lakh crore) in market value since December 2024. A large part of this has flowed into Chinese technology companies which are trading at a steep discount to their Indian peers. Despite the recent run up in the Chinese markets, the price-to-earnings continues to be at a discount to Indian markets and Indian tech companies.

IT stocks began rallying after the first quarter commentary, which gave the street confidence in earnings growth going forward. Large deals and discretionary spends drove earnings commentary and led to built-up expectations of an earnings revival. The AI-led tech rally in the US brought focus back to growth, and Indian tech companies alluded confidence in managing clients with AI as part of their offering. In addition, an easing of the interest rate cycle in the US also brought back discretionary spends for the sectors, which were grappling with delays in large deal closures and short-duration deals.

The 2024 US elections brought in uncertainty for tech companies, and tariff threats brought in inflation fears, thereby impacting the outlook for discretionary spends going forward. US markets account for more than 50% of revenues for many IT companies, and an impact on IT spends in this key market is set to dilute earnings growth. An escalation of the tariff war and resulting inflation impact on the balance sheet of US companies will bring raw material costs into their balance sheet, thereby impacting spends.

In conclusion, Indian IT needs growth triggers, badly.

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