Amidst rerating, large-cap IT stocks, banks may offer better shelter in a volatile market, says DSP

The report also highlights that equities haven’t always outperformed other asset classes. Between 1992 and 2002, equities returned negative 3 percent annually, while debt delivered 12 percent. From 2008 to 2012, equities lost 5 percent per year, compared to a 6 percent gain in debt.

Amid the ongoing market-wide volatility, large-cap IT companies along with banks and a few other large-cap stocks may provide relative stability and serve as a defensive play, suggests the latest edition of the DSP Netra report.

“The defensive bucket of IT, banks and a few other large-cap stocks can be used to tide over the market volatility,” stated the report.

The report highlights that Indian large-cap IT stocks have undergone significant derating amid sectoral slowdown, negative news flow, and an uncertain outlook even though the IT sector fundamentals remain strong. Tata Consultancy Services (TCS), for example, has seen its P/E fall from 41x to around 20x.

According to the report, the Nifty IT index has delivered around 12.5 percent CAGR in both earnings per share and index returns since December 2006. Meanwhile, leading firms in the sector continue to post return on invested capital (ROIC) above 40 percent.

While Indian IT majors have reported dollar revenue growth of just 2.7 percent in FY24 and FY25, the software services export surplus grew at 10.3 percent in the same period, supported largely by Global Capability Centres (GCCs). However, the report cautions that even this segment’s growth is now normalising.

Not all agree though. In recent conversations with Moneycontrol, some market participants had said that midcaps remain better positioned, even at premium valuations, driven by stronger growth. But with GenAI disruption and restructuring underway, they caution that this is a transition year for the sector and until visibility improves, IT may remain an underperformer despite its recent resilience.

Valuation disconnect across broader market

The shift toward defensiveness comes at a time when broader equity valuations appear stretched. The Nifty 500’s median P/E is currently around 41x, while median earnings growth is just 9 percent year-on-year. DSP warns that this imbalance is unsustainable.

Small- and mid-cap (SMID) stocks are particularly at risk, with elevated valuations and high earnings expectations amid a weakening domestic growth backdrop. “A clear earnings revival is needed to justify current prices and attract buyers,” the report notes.

Macroeconomic indicators are also softening. Nominal GDP growth has slowed to 9.7 percent, credit growth is at 12.9 percent, and personal loan growth has moderated. Wage growth, both corporate and rural, remains sluggish, and revenue growth across sectors such as automobiles, construction materials, and consumer durables is below long-term averages, the report says.

Debt has outperformed equities in past cycles

The report also highlights that equities haven’t always outperformed other asset classes. Between 1992 and 2002, equities returned negative 3 percent annually, while debt delivered 12 percent. From 2008 to 2012, equities lost 5 percent per year, compared to a 6 percent gain in debt.

“It took more than four years for stocks to catch up to debt in the last cycle,” the report notes. Even over multi-year periods, equity returns have at times failed to beat inflation or debt returns, particularly when entry valuations were high. “Achieving mid-single-digit real returns over the long run is more difficult than commonly assumed,” the report cautions.

Given these conditions, the report advises a pivot from momentum-driven investing toward quality.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.