Indian IT stocks may see more valuation gains, says Jefferies report

A Jefferies report suggests Indian IT stocks could see valuation gains if revenue growth stays stable and AI spending fears don't rise. The recent rally was driven by investor sentiment, not improved earnings, cautioning against limited future gains.

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Indian IT stocks could see further gains in valuations if revenue growth expectations remain stable and concerns over global artificial intelligence (AI) spending do not increase, according to a report by brokerage firm Jefferies. The brokerage said the recent rally in IT stocks has largely been driven by improved investor sentiment about the sector's long-term growth prospects, rather than an improvement in revenue or earnings estimates. However, it cautioned that further gains in valuations of large IT companies could be limited unless the growth outlook improves.

Conditions for PE Rerating

“While the growth outlook for IT remains uncertain, with stocks pricing 2-4ppts lower growth vs. history, any lack of disappointment in growth expectations and worsening sentiment on global AI capex could drive PE rerating,” Jefferies said in its report dated October 20. It noted that stable growth expectations and the absence of further deterioration in sentiment around global AI spending could support a re-rating of price-to-earnings (PE) multiples.

Market Performance vs. Fundamentals

The Nifty IT index has risen around 3 per cent since February 2026 and outperformed the Nifty 50 by 12 percentage points during the period. The entire outperformance came in October, after the index fell nearly 20 per cent in the first two months of the year, the report said. IT stocks gained up to 20 per cent in October, mainly due to an expansion in PE multiples, despite limited improvement in revenue growth and earnings estimates. Jefferies said consensus earnings-per-share estimates for large IT companies have been cut by 3-5 per cent since February, despite favourable currency movements.

Valuation and Investment Outlook

According to the report, current share prices imply organic constant-currency revenue growth of 0-9 per cent for large IT companies and 6-14 per cent for mid-sized firms over FY26-36. These estimates are 2-4 percentage points below the growth recorded during FY16-26. “Given that best-case PE multiples for large-cap IT firms (e.g., Wipro) range from 19-22x, the risk-reward profile is unfavourable beyond 17-18x PE,” the report said. Jefferies advised investors to remain selective, saying further valuation gains will depend on earnings growth visibility and companies' ability to sustain their long-term revenue growth.

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