Indian IT valuations, the brokerage and research house argued, are at large premium to history despite material correction from the top. Their analysis of six large correction cycles for the Indian IT sector suggests that barring a huge sudden macro event such as the global financial crisis (GFC) and Covid-19 pandemic, stock correction is driven mainly by valuation and not earnings per share (EPS). IT valuations, it said, are stretched by every measure, and that will drive a correction in these stocks if the US macro weakens.
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“They (IT stocks) trade at 34 per cent premium to one-year pre-Covid average, unlike 11 per cent premium for Nifty and single-digit premium for S&P 500 and S&P IT. The top 4 Indian IT names could see large valuation correction as macro in the US weakens. We see HCL Tech at high risk of over 20 per cent valuation correction, around 15 per cent for Infosys and Wipro, and 8 per cent for TCS,” the Credit Suisse note said.
That said, most IT stocks back home have been underperformers thus far in calendar year 2022 (CY22). The Nifty IT index has tumbled nearly 25 per cent year-to-date. In comparison, the Nifty50 index has moved up over 7 per cent during this period, ACE Equity data showed.
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