IT's market grip loosens in Nifty 50, weight at 16-year low of 11.66%

Weak earnings, Trump policies weigh on IT stocks

India's top information technology (IT) services companies — Tata Consultancy Services, Infosys, Wipro, and HCLTech — were expected to outperform during a downturn on Dalal Street as the bulk of their revenues comes from exports. However, IT services companies have become the biggest laggards on the bourses, leading to a sharp decline in their weight in the benchmark Nifty 50.

 

The IT sector’s weight in the Nifty 50 has slipped to a 16-year low of 11.66 per cent, down sharply from 13.53 per cent at the end of December 2024 and 12.48 per cent at the end of March 2024. This marks a sharp reversal in the industry’s fortunes, which accounted for 17.67 per cent of the Nifty 50 at the end of March 2022 — the highest in 25 years. For comparison, the sector has accounted for an average of 13.5 per cent of the Nifty 50 since 2001.

 

The Nifty IT Index — which tracks the market capitalisation of the country's 10 biggest IT services companies — is down 14.1 per cent since the start of the calendar year, compared to 0.06 rise in the Nifty 50 during the same period. In contrast, IT companies were among the top performers on the bourses last year. The Nifty IT Index rallied 22 per cent in 2024, compared to an 8.8 per cent rise in the Nifty 50.

 

The IT sector also behaved as a safe haven for investors in the first phase of the market correction, with the IT index rising 3.3 per cent from September to December 2024, while the Nifty declined 8.4 per cent during the same period. 

 

Analysts attribute the sharp reversal in IT stocks’ performance to the sector's weak earnings growth in recent quarters and investor concerns over the potential impact of US President Donald Trump’s economic policies on IT services companies.

 

“IT companies’ revenues and profits have been growing in the low single digits for many quarters now. Their high exposure to the US market has raised fears that a potential slowdown in US economic growth, triggered by President Trump’s tariff wars, will further dampen industry growth in the coming quarters," says Chokkalingam G, founder of Equinomics Research.

 

According to him, this raises the risk of further derating of IT companies, leading to a continued decline in their valuations. The combined net sales of IT companies grew 5.9 per cent year-on-year (Y-o-Y) in the first nine months (9M) of 2024-25 (FY25), unchanged from the 5.9 per cent growth recorded in 2023-24 (FY24). Their combined net profit rose 9.9 per cent Y-o-Y in 9MFY25, an improvement over the 9.9 per cent growth in FY24.

 

The recent correction in IT stock prices has brought down valuations, but the sector still trades at a premium to the broader market. The top 10 IT companies in the Nifty IT Index are currently trading at a trailing price-to-earnings (P/E) multiple of 26.9x, down from 31x at the end of December last year and a peak valuation of 32.1x at the end of March 2022. In comparison, Nifty 50 companies are trading at a trailing P/E of 21X, down from 22.1x at the end of December 2024 and a peak valuation of 29.6x at the end of December 2020.

 

There is a risk of a further decline in IT sector valuations if the US economy enters a recession.

 

“Recession fears in the US have raised the risk of a downside in IT industry valuations. However, the IT sector is likely to continue trading at a premium to the broader market, given even bigger earnings headwinds for domestically focused sectors such as fast-moving consumer goods, automotive, commodities, and banking and finance,” says Dhananjay Sinha, co-head of research and equity strategy at Systematix Institutional Equities.

 

According to him, the worst may be behind the sector, and it is unlikely to underperform the broader market any further.