Should you buy "IT" stocks now, or wait for a deeper correction? The Nifty IT index may hold the answer
- Don David
- 1 day ago
- 4 min read
The Nifty IT Index has experienced a volatile cycle over the past year, marked by premium valuations in late 2024, a sharp correction in early 2025, and recent signs of stabilization. While long-term growth drivers remain intact, short-term earnings pressures and global uncertainties have weighed on sentiment. This report examines valuation trends, earnings performance, institutional flows, and technical signals to assess the medium-term outlook for the sector.
Valuation Trends: From Premium to Realignment
The price-to-earnings ratio (P/E) is simply how much investors are willing to pay for each rupee of a company’s profit. A high P/E usually means the market has high growth expectations or is expensive, while a lower P/E suggests more moderate expectations or better value.
The IT sector’s P/E ratio has moved through a clear cycle of optimism, correction, and stabilization. Starting at 32.56 in July 2024, valuations peaked at 35.19 by September and remained elevated through December, showcasing strong investor confidence. However, early 2025 brought a sharp de-rating, with the ratio plunging nearly 22% to 25.92 in April amid concerns over margin pressures, weaker client spending, and global macro headwinds. While valuations briefly recovered and stabilized between 27–29x from May, the latest quarter saw another sharp drop to 25.51, reflecting mounting pressures, fading investor confidence, and a harsher valuation reset. Overall, the sector has endured a 15% year-on-year de-rating, with growth expectations now being priced in far more cautiously.
Earnings Performance: Year on Year Strength vs. Quarter on Quarter Moderation
source: screener
The IT sector reported steady growth this year, with average revenues rising 12.2% and net profits up 24.7%. Interestingly, mid-sized companies outshined the larger players.
Coforge was the clear standout, with revenues up 56.5% and profits soaring 138.9% year-on-year. Strong demand in its niche focus areas and new client wins drove this momentum.
Persistent Systems continued its steady double-digit growth, with revenues up 21.8% and profits rising 38.9%, thanks to its strength in digital engineering and cloud services.
Tech Mahindra may have had flat revenue growth, but it delivered the strongest quarterly profit jump of 12.2%, and a 39.5% YoY profit rise, showing its cost-cutting and margin recovery efforts are paying off.
Overall, these mid-cap firms showed that agility and sharper execution can deliver stronger results than size alone.
In contrast, Tier 1 players saw their quarter-on-quarter growth slowing down: revenues rose just 2.04% and net profits by 0.91%. Large players such as TCS, Wipro, and HCLTech even reported sequential profit declines, reflecting near-term margin pressures and cautious client spending. This divergence robust annual growth versus muted quarterly momentum explains the valuation correction in early 2025 as investors reassessed near-term expectations
The RBI’s August 2025 bulletin points to early signs of resilience in IT. Operating profit growth, which was 2.4% in Q4 FY25, improved to 5.4% in Q1 FY26. That’s in sharp contrast to non-IT services and manufacturing, where operating profits actually slipped over the same period. In other words, while much of corporate India is feeling the squeeze, IT seems to be quietly turning a corner. However, when it comes to operating profit margins, non-IT sectors still hold the edge, with Q1 FY26 margins at 22.7% versus 21.6% for IT, showing that while IT’s growth momentum is improving, it still has some catching up to do on efficiency.
Institutional Flows: Buying the Correction
Despite the Nifty IT index falling 9% in July, mutual funds increased exposure to quality names such as Infosys, TCS, HCLTech, and Tech Mahindra. This suggests institutional investors view the correction as a valuation-driven opportunity to accumulate long-term winners at discounted levels. With the P/E ratio now closer to historical averages and downside risks reduced, fund managers are positioning for a medium-term recovery supported by digital transformation, AI adoption, and outsourcing demand.
Technical Outlook: Consolidation Before Recovery
The Nifty IT Index, trading near 36,280, has rebounded from recent support at 31,945. On the charts, the RSI at 46 signals gradual recovery from oversold territory, though stronger momentum would require a move above 50–55. The MACD remains negative but the narrowing gap points to a potential bullish crossover.
Key resistance is placed around 37,500; a breakout above this level could trigger an up-move toward 40,000. Conversely, a breach below 34,500 may drag the index back to 32,000. Overall, the technical setup points to near-term consolidation with scope for an upside breakout if fundamentals stabilize further.
Risks to Watch
U.S. recessionary risks and client budget cuts in technology spending.
Rupee appreciation, which could weigh on export revenues.
Pricing pressure in large digital contracts, especially in cost-sensitive geographies.
Delays in discretionary IT projects amid global macro uncertainty
Conclusion & Investment Implications
The Nifty IT Index has undergone a healthy correction, with valuations moving from a premium 35x in late 2024 to a more sustainable 27–29x range. Year-on-year earnings demonstrate that fundamentals remain resilient, even as quarterly performance reflects short-term caution. Institutional investors have used this correction to increase exposure to high-quality IT stocks, signaling confidence in the sector’s long-term growth story.
From a technical perspective, the index is consolidating near support with potential for a breakout above 37,500, supported by easing global monetary conditions such as possible U.S. Fed rate cuts. While risks remain, the combination of attractive valuations, strong order books, and structural demand drivers suggests that the sector may be entering a stabilization phase with medium-term recovery potential.
Disclaimer: This content is for educational purposes only; please conduct your own research and consult with a qualified investment advisor before making any investment decisions.
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