Valuation reset hits Indian IT; Jefferies sees selective buys in mid-caps

Investing.com -- India’s information technology sector has undergone a sharp valuation correction in 2025, with the Nifty IT index underperforming the broader Nifty 50 by 25% year-to-date, driven by a 16% price-to-earnings derating amid macroeconomic and AI-related uncertainties, according to a recent note by Jefferies.

The correction marks a stark reversal from 2023 and 2024, when Nifty IT outperformed by 4% and 13% respectively, the brokerage said. 

The derating stems from elevated valuations at the start of 2025, when PE multiples traded at a 15% premium to their five-year average, combined with uncertain demand outlook.

Mid-sized IT firms have significantly outperformed their larger counterparts during the year, with stocks like Coforge, Sagility, and Hexaware beating the Nifty IT index by 11% to 20%.

This divergence reflects earnings upgrades for mid-caps while large IT firms, including industry bellwethers TCS, Infosys, and Wipro, witnessed earnings cuts of 3% to 12%, according to Jefferies.

Stock performance has strongly correlated with earnings revisions, with only LTIM and Hexaware delivering positive returns year-to-date. Mumbai-headquartered TCS, India’s largest IT services provider, declined 23%, while Bengaluru-based Infosys dropped 17%.

The uncertain growth trajectory poses continued risks to sector performance. Global consulting major Accenture’s fiscal 2025 guidance implies flat revenue growth in the best-case scenario, while Tech Mahindra management expects only gradual improvement, placing consensus expectations of 7% US dollar revenue growth at risk, the brokerage said. 

Jefferies projects aggregate revenue growth of 4.3% for fiscal 2027, substantially below the consensus estimate of 6.8%. For fiscal 2028, the brokerage’s 5.4% projection trails consensus expectations of 6.3%.

After the year’s correction, most IT stocks now trade near their five-year average PE multiples, reducing risks of further derating. However, PE rerating remains unlikely given the historical correlation between multiples and revenue growth expectations, according to the analysts.

The Nifty IT currently trades at 23.7 times forward earnings, below its five-year average of 25.3 times. More significantly, the index commands a 33% PE premium to Accenture, contrasting sharply with a 10-year average discount of 12% to the US-based firm. 

This premium disparity is likely to constrain foreign institutional investor interest, while domestic mutual funds are no longer overweight the sector, the report states.

Jefferies adopts a selective stance, preferring mid-sized firms given their higher earnings growth potential. 

The brokerage rates Coforge, a digital transformation specialist, as a buy with a target price of 2,180 Indian rupees, implying 17% upside. 

Healthcare-focused BPO provider Sagility carries a target of 62 rupees with 23% potential gains, while IT services firm Hexaware has an 8% upside target of 820 rupees.

Among large-caps, Jefferies maintains “buy” ratings on Infosys with a 9% upside target of 1,700 rupees and HCLTech with 7% potential gains to 1,730 rupees. 

The brokerage assigns “hold” ratings to TCS and LTIMindtree, while rating Wipro, Tech Mahindra, and Newgen as "underperform."