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.
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Facts Only
The Nifty IT index is trading at a price-to-earnings multiple of 20.6 times
This valuation is the lowest since July 2020 post-Covid period
The sector's five-year average P/E ratio is 29.16, and the ten-year average is 24.4
The Nifty IT index lost 31.5% from October 1, 2024, compared to the 13.4% dip in the Nifty
Over the last one year, the Nifty IT index has lost 19.2%, while the broad Nifty 50 declined by 3.6%
The sector's weight in the Nifty has reached an all-time low of 8.85%
The Nifty IT index offers a dividend yield of 3.5% and an earnings yield of 5%
Executive Summary
Full Take
The Indian IT sector is experiencing a downturn, with lower valuations, reduced investor appetite, and a shift in focus due to AI advancements and geopolitical events. However, this situation also presents opportunities for value buyers, as indicated by the sector's attractive dividend yield and earnings yield. The sector's long-term prospects remain uncertain, with concerns about the impact of AI on software services persisting despite the temporary diversion caused by the West Asia conflict. It is crucial for investors to approach the IT sector with a balanced investment strategy, combining lump sum allocation now and staggered SIPs over time.
Patterns detected: ARC-0024 Ambiguity (the article does not explicitly state whether the extreme pessimism will continue or if it's a temporary situation)
Sentinel — Human
This analysis suggests that the text is likely to be human-written, demonstrating variable sentence length, a personal voice, and no suspicious claims or inconvenient sources.