Indian Largecap IT stocks: A relative safe haven amid market volatility?

With IT's weight in the Nifty near decade lows, analysts suggest the sector could offer relative outperformance in volatile markets

Indian largecap IT stocks, once trading at premium valuations, have seen a sharp derating amid a sectoral slowdown, persistent negative news flow, and an uncertain global demand outlook. Industry bellwether Tata Consultancy Services (TCS) has seen its trailing twelve-month price-to-earnings (PE) ratio fall from 41x to around 20x, even as its profit CAGR stood at 8.5% and stock CAGR at about 6% over the past five years.

 

While the Nifty IT Total Return Index (TRI) and sectoral earnings per share (EPS) have compounded at roughly 12.5% annually over the past two decades, the index has lagged the broader Nifty over the last three to five years.

 

Analysts at DSP Mutual Fund note that IT’s weight in the Nifty is now hovering near decade lows, but the sector’s fundamentals remain robust, with top-tier companies continuing to deliver return on invested capital (ROIC) above 40%. This could set the stage for relative outperformance if valuations correct further.

 

However, this positioning is more about relative safety than absolute return potential. Market strategists at DSP MF suggest that in the current volatile environment, a defensive portfolio comprising largecap IT, banks, and select other blue-chip stocks could help investors weather short-term turbulence while preserving capital.

 

"With IT’s weight in the Nifty near decade lows, and leading firms still generating ROICs above 40%, the sector may offer relative outperformance if valuations fall further. This doesn’t signal that these stocks can deliver absolute returns, but when compared to the rest of the market, this may act as a relatively better investment avenue. The defensive bucket of IT, Banks and a few other largecap stocks can be used to tide over the market volatility," said Sahil Kapoor, Market Strategist and Head of Products at DSP Mutual Fund. 

 

Indian largecap IT stocks have significantly derated.

  What’s driving this opportunity?

IT’s weight in the Nifty is near decade lows

Leading firms are still generating ROICs above 40%

The sector may offer relative outperformance if valuations fall further

The defensive bucket of IT, Banks and a few other largecap stocks can be used to tide over the market volatility