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Valuations of IT firms indicate structural change in perception: Motilal Oswal

Indian IT services companies have survived and thrived multiple technology cycles and have moved up the value chain. (Photo: Hindustan Times)Premium
Indian IT services companies have survived and thrived multiple technology cycles and have moved up the value chain. (Photo: Hindustan Times)

  • Motilal Oswal continues to expect a strong spending cycle for IT services over the long term, driven by huge addressable opportunities from cloud, constant evolution of technologies, and increased focus on outsourcing

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BENGALURU: High valuations of Indian IT services companies indicate a structural change in perception, according to a report by Motilal Oswal.

The IT companies in the brokerage firm's coverage are trading at a decade high premium to the Nifty. The Nifty IT index has risen 22% in the last three months and 78% in one year, and valuations for the aggregate coverage universe has soared to 76% above the mean. Its P/E premium relative to the Nifty is the highest since pre-global financial crisis, at 38%.

“Indian IT services companies have survived and thrived multiple technology cycles and have moved up the value chain. Technology has now become staple and nondiscretionary. IT services players have improved their market positioning in the enterprises’ technology spending ecosystem, which has increased their relevance and stickiness," the report said.

With technology becoming a differentiating aspect for businesses, the next decade will be an era of customisation, which is beneficial to IT services companies, the brokerage firm said.

Sustainability of the business model has been driving a re-rating. Motilal Oswal continues to expect a strong spending cycle for IT services over the long term, driven by huge addressable opportunities from cloud, constant evolution of technologies, and increased focus on outsourcing.

“Over the past two decades, there have been constant questions over the sustainability of the IT services’ business model. Despite these questions, Indian IT companies have managed to constantly move up the value chain. The current tech upcycle has answered the critical question of sustainability of the business model and hence the re-rating," Motilal Oswal said.

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