In the last three years, every time the stocks of IT majors — TCS, Infosys, Wipro — have risen, they have done so only to fall again such that their returns are largely flat in this period while the Nifty has zoomed 50%.
With the Nifty 50 scaling 25,000 on Friday and continuing its journey of recouping lost ground from its September 2024 peak, investors in major IT stocks continue to watch from behind. In the last three years, every time the stocks of IT majors — TCS, Infosys, Wipro — have risen, they have done so only to fall again such that their returns are largely flat in this period while the Nifty has zoomed 50 per cent.
Following this, investors would be tempted to think ‘is the correction over?’ While there has been a severe timewise correction in stocks, unfortunately by one metric they are in their most expensive zone in the last 10 years! This may continue to weigh on shareholder returns.
It’s all relative
The period since GFC triggered the phase of global investor’s hunger for yields as interest rates in developed markets dropped to near zero or even negative levels. Compared to a 10-year government bonds yielding 0 to 2 per cent, even stocks with PE of 30 times or earnings yield (1/PE) of 3.3 per cent (generally viewed expensive in the pre GFC era) suddenly appeared attractive. As long as the earnings yield was above the government bond yield, and it also came with decent and consistent earnings growth, such stocks found strong favour. IT stocks neatly fitted into this spot.
The charts compare the bond-equity yield spread for the IT stocks from the perspective of a foreign investor, which is the stock’s earnings yield minus the US 10-year bond yield, for the last 10 years. By this measure although stock valuations (barring HCLTech) have corrected significantly from highs, the irony is that on a relative basis they are hovering around their most expensive levels in the last 10 years.
Take TCS – its PE today is bang where it was 10 years back, yet when compared to other investible options from an FPI perspective it is unattractive versus 10 years back. Not only this, equally on the unfavourable side is its growth prospects today. In FY2015, TCS delivered constant currency (CC) revenue growth of 17 per cent — that alone on its own sufficiently justified a 25x PE, leaving apart the attractive bond-equity yield spread. To the contrary, its CC revenue growth in FY25 was just 4.2 per cent.
Not just TCS, but for its major contemporaries as well — Infosys, Wipro and HCLTech — the period FY24-27 will rank amongst their worst three-year period in terms of growth. In this context, with bond yields globally on the rise and providing attractive yields, it might make FPIs look past these stocks.
Hunger for growth
As compared to hunger for yields in the era of low interest rates, global investors are now hungry for growth. High payout ratios — like those seen in IT majors that distribute most of their profits to shareholders instead of reinvesting for growth in new businesses — worked well earlier, but may now put pressure on these companies.
As their core IT services business faces competition from GCCs, mid-cap IT players and, more importantly, AI-related disruption, growth may remain lacklustre. Slow growth for three consecutive years may also reflect structural changes beyond cyclical factors.
Investors will be willing to buy stocks/indices with low or negative bond-equity yield spread if the growth prospects are bright, but currently that is missing for IT majors.
Published on June 7, 2025
