Why Indian IT is emerging as contra bet – News Air Insight

After a long phase of underperformance, Indian IT may be setting up for a re-rating—here’s why patient investors might take note.

Indian IT companies today stand at a fascinating juncture. Once the darlings of global equity markets, the sector now finds itself relatively unloved—under-represented both in domestic benchmarks and in global indices.

But history tells us that such phases of neglect often sow the seeds for future outperformance. When a fundamentally sound sector falls out of favour, it tends to offer fertile ground for contrarian investors willing to look beyond the noise.

Why Look at IT Now?

While Indian IT stocks may not be “cheap” in absolute terms, they appear reasonably valued compared to the broader market. This makes them a relative opportunity today, and with any further correction, potentially an absolute value play.

Source: NSE, DSP. Data as of Sep 2025.Despite near-term challenges, the sector continues to demonstrate earnings resilience. In many companies, earnings growth has exceeded total shareholder returns over the past three years—a clear sign that fundamentals remain solid even as valuations have de-rated. That gap between business strength and investor sentiment could set the stage for a re-rating once confidence returns.Dividends provide an additional cushion. The Nifty IT Index’s dividend yield stands at 3.2%, more than double the Nifty 50’s 1.3%, offering investors a meaningful measure of downside protection at a time when margins of safety are limited elsewhere in the market.

Source: NSE, DSP. Data as of Sep 2025.

Understanding the Underperformance

The sector’s recent lag is the result of both cyclical and structural forces.

The digital acceleration boom of 2020–21, driven by pandemic-era demand, naturally cooled as economies reopened and spending normalised. Global macro headwinds—rising inflation and high U.S. interest rates—further led to budget tightening among global clients, particularly in discretionary IT projects.

Rising costs in 2022 added to the strain, with margins sliding from 18–20% to around 14–16% as companies struggled to fully pass on higher expenses. At its peak in early 2022, the Nifty IT Index traded at about 38x forward earnings. That valuation compressed sharply to ~21x by mid-2023, resulting in one of the most significant sector-wide de-ratings in recent years.

Global Context and Relative Positioning

Globally, IT remains one of the most sought-after sectors, still commanding premium valuations. Yet, Indian IT has significantly underperformed its international peers in the past three years, leading to its lowest representation in global IT indices in over a decade.

While this under-representation doesn’t guarantee a rally, it does highlight how deeply sentiment has turned. Historically, such extremes in relative performance have often preceded stronger recovery phases. Interestingly, despite lower valuations, Indian large-cap IT firms continue to deliver superior return on equity compared to many global peers—suggesting operational quality remains intact even amid subdued market enthusiasm.

Source: Bloomberg, DSP. Data as of Sep 2025.

Looking Ahead

Indian IT may not yet qualify as a deep-value story, but it stands as one of the more balanced relative opportunities in the current equity landscape. The sector’s combination of moderate valuations, robust cash flows, and healthy dividend yields offers a favourable setup for patient investors.

As global demand stabilises and corporate technology budgets normalise, the potential for a re-rating cycle remains credible. Many IT firms continue to generate free cash flows exceeding 100% of net profits, highlighting their fundamental strength and ability to reward shareholders through consistent payouts.

The missing piece today is growth visibility. But, as investing wisdom reminds us, good news and good prices rarely come together. Periods of pessimism often present the best hunting grounds for long-term opportunity.

Source: Bloomberg, DSP. Data as of Sep 2025.

Conclusion

Indian IT’s current weakness contrasts sharply with its strong fundamentals—cash-rich balance sheets, solid earnings power, and high return on equity. For investors willing to look contrarian, the sector offers a compelling case for gradual accumulation.

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If the Nifty IT Index were to correct another 10–15%, it could present an absolute bargain. Even now, it stands as a relative value play—a steady, income-generating way to add equity exposure in a market where much else looks fully priced.

In a landscape crowded with momentum trades, Indian IT may quietly be setting up to surprise on the upside once again.

(The author is Product Manager and Market Strategist, DSP Mutual Fund)

(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of The Economic Times)