BSE IT Index trading at P/E multiple of 34.3x - nearly 29% higher than that of Sensex

the first time in five years that the IT index valuations are higher than the benchmark indexes. The IT sector had last traded at a premium valuation for nearly two years between the middle of 2013 and 2015. The IT sector premium then over the market averaged around 12.5 percent.

The industry has since seen a sharp rerating in its valuations in the past one and a half years. The BSE IT Index’s current P/E multiple — more than twice at the end of March 2020s (15.9x) — is up nearly 30 percent, from 26.3x at the end of December 2020.

The IT industry’s current valuation is also at its highest level in over a decade. The BSE IT Index’s current P/E multiple of 34.3x is nearly 70 percent higher than its 10-year average earnings multiple of 20.1x. Analysts attribute the valuation premium and record-high valuation to the industry’s superior earnings outlook. “IT companies are expected to top the revenue and profit growth charts for the next two years. This means most long-term investors are overweight on the sector,” says Shailendra Kumar, chief investment officer, Narnolia Securities.

In comparison, there is a lot of uncertainty about the future earnings trajectory of other key sectors, such as banks, metals and mining, oil and gas, FMCG, and automotive due to factors like rise in interest rate and higher inflation.

Analysts see the premium to stay awhile, given the structural changes to the global economy due to the Covid-19 pandemic.