View on Indian IT: Understanding the Current Cycle

View on Indian IT: Understanding the Current Cycle

At first glance, this may seem like an odd time to question IT. Global headlines continue to point to a strong technology cycle. Capex is rising, large technology companies are delivering earnings momentum, and AI-led investments are accelerating.

But this is also where the current cycle can be misunderstood.

What we are witnessing today is largely an infrastructure-led expansion. Investments are flowing into semiconductors, cloud capacity and data centres. This is where growth is visible and where market attention is concentrated. Enterprise spending, however, is moving at a different pace. Discretionary budgets remain cautious, decision-making cycles have lengthened, and much of the incremental spend is being directed towards infrastructure rather than software or services.

This distinction becomes important when thinking about Indian IT. The sector is not directly linked to the infrastructure leg of the cycle. Its growth is far more dependent on enterprise technology spending, particularly from global clients. And that part of the cycle has not yet turned meaningfully.

Which brings us to the current debate.

Everyone agrees that IT works over the long term. That is not in question. Over multiple decades, the sector has delivered consistent growth, strong cash flows and high return ratios. It has earned its place as a core component of the market. The more relevant question, however, is what it costs to be early. Both US and India data are pointing to a similar setup. In the US, Software & Services is now trading at a discount to the broader market on forward valuations, something that has happened only once before since 2008. In India, the premium that IT typically commands over the broader market has compressed back to zero.

On the surface, this appears attractive. Lower valuations tend to invite interest. But history suggests that valuation alone is not enough. In previous instances where similar conditions emerged, the sector did not re-rate immediately. Instead, it went through extended phases of sideways movement, even as other parts of the market continued to perform. The underlying businesses remained intact, but earnings momentum took time to recover. Capital allocated during these phases did not get impaired, but it did not compound meaningfully either.

This is where the nature of cyclicality in IT becomes clearer. It is not a sector where value is destroyed. It is a sector where time gets extended.

For investors, this creates a different kind of risk. Not the risk of permanent loss, but the risk of opportunity cost. Periods where capital remains tied up in a segment that is waiting for demand to return, while other opportunities play out elsewhere.

That is the trade-off embedded in the current setup.

Cyclical positioning in IT is therefore not about taking a negative view on technology. It is about recognising that valuation mean reversion is a necessary condition for returns, but not a sufficient one. The missing ingredient continues to be a visible recovery in discretionary enterprise spending.

Being underweight IT today is not a call on the sector. It is a call on time.

 

 

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