But while IT stocks are way above those lows, in terms of valuations, they are near their lowest-ever levels. NSE has price-earnings data since January 1997, and Friday’s level of 9.58 times trailing earnings for the CNX IT index is the lowest reading ever. Even during 2001, the last time the US went into recession, the IT index fell to only as low as 17.28 times trailing earnings. This was after the September 11 attacks, when valuations of most stocks had tumbled. It’s also important to note that many IT companies have significant cash on their books. Adjusted for the cash on IT companies’ books, the valuation of the core business would be much lower. Patni Computer Systems Ltd, for instance, has cash worth $260 million (about Rs1,245 crore) on its books, which amounts to three-fourths of its market capitalization.

The extremely low valuations currently reveal that the outlook for earnings growth of IT companies is far bleaker now than it has been in at least 10 years. To be fair, the base of India’s IT industry has increased considerably in the past few years, and growth would naturally slow.

Also See Falling Stock (Graphic)

In the previous downturn, although growth rates fell sharply, earnings still grew in healthy double digits. In the current one, earnings are expected to decline even for some top-tier companies.

The current downturn is expected to be more prolonged and is spread across various sectors, unlike the tech bust last time around. Competition has increased with MNCs gaining both scale and experience in offshoring. Thus, both volumes and pricing are at risk, leading to a bleak forecast for IT companies.

There are some positives such as a weak rupee, lower attrition and the benefit of a higher proportion of variable pay compared with previous years. But these factors will far from offset the double whammy of lower volumes and declining pricing power.

In any case, the benefits of a weaker rupee will not be fully available because of aggressive hedging policies most IT companies had adopted. And as far as the benefits of variable pay goes, a report by India Infoline’s institutional research team points out that variable pay is applicable primarily for offshore workers, who account for only 15-20% of revenues.

For onsite workers, who account for 35-40% of revenues, the salary structure is more rigid because of local state laws. According to India Infoline’s analysts, even a 3% reduction in pricing will fully erode any benefits IT companies may derive from cost savings owing to a variable pay structure.

Amid all this, the IT stock that has fallen the least this year is that of Infosys Technologies Ltd, just like the previous downturn, showing that the markets tend to stick with quality in bad times. Infosys trades at about 13 times trailing earnings, or at a premium of about 37% to the sector.

It remains to be seen, however, if Infosys is able to repeat its outperformance in terms of financial performance this time around.

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Graphics by Paras Jain / Mint