The Nifty IT index has given phenomenal return aided by accelerated adoption of technology. Post-COVID, the index has rallied 50 percent this year and 85 percent in the last one year. Largecap IT valuations are at 30 times.

How do they compare with the past?

The last bull run for the IT companies was in the aftermath of the global financial crisis, which started in 2009, and lasted till 2015. At that time, in that period of five years, largecap IT companies saw a revenue growth of 15.50 percent on an average.

But bear in mind the drop, the starting point in 2009 was also pretty low because in the global financial crisis, the impact on the IT companies was direct, there was a direct cutback in IT spending by BFSI clients, which is why the recovery that we saw in terms of revenues was also fairly astonishing.

How the Nifty IT Index performed?

In a span of five years, we saw the Nifty IT index go up six times. So, the low was about 2100, and it went to a peak of 12,800. But what happened thereafter, in the five years till COVID, we didn't see the index do too much. So on absolute basis, the index gained only about 30 percent, which basically again, as I said, it didn't do too much.

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IT companies’ valuation

The valuations in that period of 2010 to 2015 rose from a low of 9x all the way to that of 22x. So basically, the last bull run tells us that valuations can rise at a very steep pace. CNBC-TV18’s Reema Tendulkar gets more details on IT stock price in context with the last bull run.

Girish Pai, head-research of Nirmal Bang Institutional Equities, said, “We have covered quite a bit of distance, the multiples have kind of expanded quite a bit. One should remember that the earnings have also expanded. So it is not that earnings have remained constant, we have actually seen, earnings accelerate in the timeframe that I am talking about. So, I would say that as we speak, I don't see too much value there in the IT stocks.”

He said, “I think the current growth rates are largely on the back of compressed transformations that customers are doing on the digital side. That is leading to a bunching up of demand in 2021, and probably in 2022, but I see a normalisation of that beyond 2022 and we should go into a bit of a growth plateau. But that growth plateau should be at a higher level compared to the FY15 to FY20 CAGR that we saw, which was in the 6 to 8 percent region.”

Pai added, “Tier-I IT should be growing, maybe say, 10-11 percent kind of growth rate, say for the next three to five years. So that is the picture that we have. If that is the kind of growth rate we are seeing, should some of these companies be trading at the 30-35 times forward PE multiples - that is the key question that one needs to ask. I would say, low-interest rate regime globally is going to be a key determinant about whether the multiples will remain there or not.”

“I would say for the next three years, if I look at FY21 to FY24, I would probably think that revenue growth should be in the region of about 12 to 13 percent for the tier-I companies with a peak in FY22 and a bit of a slowdown is FY23 and beyond. I would say that tier-II companies should be growing a lot faster, maybe somewhere in the high-teens over this particular timeframe. Some companies will probably go a lot faster, probably in the 20s, late 20s or maybe in the early 30s. So that is the kind of growth picture we are seeing,” he said.

For full interview, watch accompanying video.

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(Edited by : Dipika)

First Published:Sept 23, 2021 2:04 PM IST