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IT Stocks Trade At A Discount Despite Outperformance

The Nifty IT Index has outperformed all sectoral peers so far this year. Still, it continues to trade at a discount to the NSE Nifty 50 Index.

The technology stock basket is about 11 percent cheaper with a price-to-earnings multiple of 19.6 against 22.2 times for the 50-stock gauge. The discount, which narrowed from over 30 percent seen during early 2017, has reached a two-year high even as the IT index gained over 20 percent in 2018.

IT Stocks Trade At A Discount Despite Outperformance

“A slew of multi-billion-dollar buybacks by large IT companies helped improve valuations,” Mahantesh Sabarad, head of retail research at SBICAP Securities, told BloombergQuint in an emailed statement. “The one-year return from large-cap IT stocks can be 15-18 percent.”

The technology stocks commanded a premium of over 30 percent to the benchmark index till 2015. It has since been trading at a discount as software services provider had to deal visa challenges in the U.S., lower spending in overseas market and a transition to cloud computing, automation and newer technologies like artificial intelligence.

Sabarad says a recovery in the U.S. economy augurs well for Indian IT companies as prospects of higher IT spends increases. “A lot of transformational projects due to rapid adoption of digitisation gives Indian IT vendors more leeway to expand their offerings, leading to better productivity and therefore margins.”

The depreciating rupee also has its advantage for Indian IT companies, he said, adding “although one may argue that cross-currency headwinds and hedging strategies of IT companies often negate the gains of a depreciating rupee”.