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Investing.com -- The Indian IT sector has experienced significant market challenges in 2025, with the NiftyIT index underperforming the Nifty50 by 25% year-to-date.
According to Jefferies, this underperformance stems primarily from a 16% PE derating amid macroeconomic uncertainties and questions surrounding artificial intelligence integration.
The sector’s struggles contrast sharply with its performance in 2023-24, when NiftyIT outperformed the broader market despite ongoing earnings estimate cuts.
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Analysts note that stocks trading at elevated PE premiums have experienced more significant derating despite delivering superior earnings, while those at reasonable valuations have weathered the storm better.
Mid-sized IT firms have emerged as relative winners in this challenging environment, outperforming the NiftyIT by 11-20% as they’ve generally seen consensus earnings upgrades. Meanwhile, large IT companies have suffered sharp earnings cuts ranging from 3-12%, contributing to their underperformance.
Jefferies suggests that growth uncertainty will continue to weigh on stock performance. With Accenture’s guidance for fiscal year 2025 pointing to flat revenue growth in the best-case scenario, consensus expectations of 7% US dollar revenue growth appear increasingly at risk.
Among the top performers in this selective market, Jefferies highlights:
Coforge Standing out among mid-sized IT firms, Coforge has demonstrated resilience amid the sector-wide challenges. The company has benefited from positive earnings revisions while many larger competitors have seen downgrades. Jefferies views Coforge as well-positioned in the current environment where stock returns correlate strongly with earnings trajectory.
Sagility: Another mid-sized IT firm earning Jefferies’ recommendation, Sagility has shown strength in a difficult market. The company represents the analyst’s preference for mid-sized IT firms that offer higher earnings growth potential compared to their larger counterparts.
While entry multiples for IT stocks have improved following this year’s derating, with most now trading near their 5-year average PEs, Jefferies cautions that significant PE rerating is unlikely. The firm notes that PE multiples historically correlate with changes in one-year forward revenue growth expectations, which remain uncertain.
Jefferies maintains a selective stance on Indian IT services, preferring mid-sized firms like Coforge and Sagility due to their higher earnings growth potential in the current market environment.
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