IT Stocks Remain Overvalued Compared to Global Peers, Expert Sees Midcap Potential

IT Sector Valuations Attractive, Despite Premium to Global Peers

The Indian IT sector has seen a sharp correction, making valuations attractive at a material discount to historical averages. However, the sector still trades at a premium to its global peers, according to Himanshu Kohli, Co-founder of Client Associates.

The IT sector is undergoing a transition phase from labor-intensive delivery to AI-centric value creation. Revenue growth for the sector has been reeling at low single digits with moderate deal wins. Margins have been under pressure with clients becoming more price sensitive owing to Gen-AI related developments.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

The revenue growth for the sector has been reeling at low single digits with moderate deal wins. The margins have been under pressure with clients becoming more price sensitive owing to Gen-AI related developments. While most of the IT companies are focusing on building their capabilities on the AI front, it still remains a relatively small pie of the overall revenues.

Select mid-tier IT companies are expected to outperform large-cap IT companies driven by niche capabilities including AI implementation, sharper execution, and differentiated client mix.

Energy Prices May Remain Elevated for Longer

Even if the markets were to see a truce in the near term, the energy prices may still remain elevated for longer given the damage to oil infrastructure. This raises the risk of downward revision in earnings in FY27, primarily in H1 FY27.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

Higher oil prices can have a direct and indirect impact on the Indian economy given its heavy dependency on energy imports. Sharp divergence in WPI (8.3 percent YoY) & CPI (3.5 percent YoY) reflects the higher impact on producers than consumers.

Government Austerity Measures May Impact Corporate Earnings

However, the government announced a small hike in retail fuel prices recently and it may likely need to increase prices further if global crude prices remain elevated for longer. This could see an adverse impact on raw material prices which could impact margins and reflect in the bottom lines of Corporate India.

Renewable Energy and Traditional Power Stocks

We remain positive on the long-term structural opportunity in both renewable energy and traditional power. However, we are cautious from a valuation perspective. The renewable energy space, especially solar, has seen very strong momentum over the past year reflecting the strong policy push and rising demand for clean energy.

Solar manufacturing companies are reporting sequential improvement in revenues as capacities ramp up across the sector with nearly 38 GW of solar capacity added in the first eleven months of FY26. However, a large part of this optimism is already reflected in stock prices.

Earnings Growth for FY27

We believe Q1 & Q2 are likely to see margin compression for Corporate India due to commodity price increase which will reflect in weaker earnings. Some of the crude-sensitive sectors, specifically paints, chemicals, and logistics, may see higher impact as elevated input costs and supply chain disruptions flow through the P&L.

Conversely, BFSI and auto may remain better positioned supported by resilient domestic credit growth and healthy demand visibility respectively. This year could end with high-single-digit to low double-digit earnings growth contingent on the duration of the oil-led disruption which is a material downgrade from the high double-digit expectations at the start of the year.