Short-Term Pain Long-Term Gain It Down But Not Out

IT companies, after giving more than 50 per cent return two years continuously, are now lagging in performance. This gives investors a chance to pick and choose their favourite stock at bargain.

IT does not take much in the stock market to change. The fortune of investors, companies as well as sectors transform without much of delay. Heroes of yesteryear may become zeros in no time.

Information Technology sector is one of those unfortunate sectors that saw its fortune changing diametrically opposite in last few quarters. After two years of outperformance in 2020 and 2021, the Nifty IT index in YTD CY22 has underperformed the Nifty by a huge 24 percentage points. Nifty 50 in last nine months is down by five per cent while Nifty IT index is down by 30 per cent. Despite such fall Nifty IT index is still outperforming the Nifty 50 by huge margin since the start of year 2020. From the start of 2020, Nifty IT index is up by 76 per cent while Nifty 50 is up by 38 per cent.

The starting point for the underperformance was the runaway valuation of IT companies especially Tier-2 IT companies. Since the start of year 2020, valuation of the IT companies have moved up substantially. For most of the major companies it has reached to almost four times it was trading at the start of the year 2020. For example, KPIT Cummins, which was trading at PE of almost single digit, is currently trading at PE of 69 times.

Despite all this fall in IT index and prices of IT companies, valuation is still above the start of 2020.

Factors that Led to Such Fall