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Indian IT stocks may need valuation reset as growth slows, says Envision's Nilesh ShahNilesh Shah, Founder of Envision Capital, expects large IT companies to grow at 5–8% in rupee terms, supported by global GDP growth and currency depreciation. Shah believes valuations should adjust to around 15 times earnings, implying a potential 10–15% correction before the sector becomes attractive for investors.By CNBCTV18February 21, 2026, 3:06:38 PM IST (Published)7 Min ReadIndian IT companies may need to trade at lower valuation multiples if earnings growth remains moderate, according to Nilesh Shah, Founder of Envision Capital.

Speaking about sector valuations, Shah said growth expectations for large IT firms have shifted, which should be reflected in stock pricing.

Shah said that if IT companies grow at 5% to 8% in rupee terms, growth in dollar or constant currency terms would be lower due to annual currency movements. Based on this growth profile, he believes valuation multiples should adjust.

“I'd probably think that the big IT companies should trade somewhere around 15 times trailing earnings,” Shah said. He noted that these companies are currently trading at about 19–20 times earnings.

According to him, a valuation of around 15 times earnings would place IT stocks at roughly a 25% discount to Nifty valuations.

Shah said Nifty companies are expected to deliver earnings growth of around 12% to 15%, which supports higher valuation multiples compared with IT firms.

He explained that while Nifty companies may justify a price-to-earnings multiple near 20 times, IT companies growing at 5% to 8%, or at most 10%, should trade closer to 15–16 times earnings.

When asked whether a correction could make the sector attractive, Shah agreed that valuations may need to decline further, referring to current consensus valuations of about 17–18 times earnings for IT companies.

These are edited excerpts of the interview.

Q: Since you've been tracking the IT sector for so long, what do you think this time around? You have seen the fears in the past, and the way they played out this time is really intense.

A: Probably it's a mix of both views, or the two extremes playing out. There's one extreme view which says basically everything is over. I probably don't agree with that, but it doesn't remain optimistic. The challenge for big IT has been that the growth rates have been falling, and I don't see a situation or an outlook where the growth rates will come back.

Q: You're negative on the Indian IT sector. For how long have you been negative? Because what we've also seen is a confluence of AI disruption and macro slowdown. So, since when have you been negative on the IT sector? And you said it's not all gloom and doom, it's not that there is an existential crisis. So, at what point do we start looking for value?

A: The broad perception of the sector is that it's a growth sector, and the challenge has been for the largecaps, the big four or five companies, which have pretty much been growing in high single digits, or maybe at 10 to 12%, which obviously is not a great place to be for a growth investor. So, I clearly believe that if I were to look over the last 30 years, every 10 years the growth rate of the big IT companies has kept falling steadily. So, right from those days of 40–50% to 20–30% to now 10–15%, and maybe we'll get into a phase where probably the growth rate will be 5% to 8% in rupee terms. So that's where it is.

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So, I don't think there's a survival challenge, because spending on technology will continue. I've never heard any big company ever say that we're going to cut our spending on technology. So as long as there's going to be spending on technology, there will be work for our IT services companies. The challenge is only that the growth rate is going to be lower, and the current valuations are not supportive of that.

Q: If the growth rate is 5% to 8% in rupee terms, then in dollar terms or constant currency, it will be a little lower given the rupee depreciation that takes place annually. What are the appropriate valuation multiples?

A: I'd probably think that the big IT companies should trade somewhere around 15 times trailing earnings. They currently trade at 19–20 times. Somewhere around 15 times should be a good number. I think that would put them at a 25% discount to the Nifty earnings.

Nifty earnings will probably grow at about 12 to 15% because the outlook has improved for Nifty companies. So, I think versus a 12% to 15% growth rate for Nifty companies getting a 20 P/E multiple versus that, for a 5% to 8% growth rate, or maybe max 10%, probably 15–16 times makes sense.

Q: So, a 10-15% correction from now—assuming the IT companies, when we look at the consensus earnings, are trading at 17–18 times—would make it interesting?

A: Yes, I think so.

Q: You've been tracking IT for so long, and you've said every decade you've seen growth fall from 40–50%. Do you see any signs of growth picking up? And if not, how much further can the growth fall? Because now we are pencilling in that at a 4–5% growth rate, a 15% multiple means another 15% fall. But if the growth has to fall to 1-2%, then even those P/E ratios will look expensive. So, one, are you seeing any signs of growth picking up for any companies? And if not, how much further can the growth fall from here?

A: So I don't think growth can fall to 1-2% because as long as global gross domestic product (GDP) growth is at 3-4%, spending on technology in dollar terms will continue at 3-4%. So Indian IT services companies will keep growing at least at 3-4% in dollar terms. And I'm talking of the big companies, the big IT companies. And then you add to that another 3-4% of rupee depreciation, you probably stand at about 7-8%. So I think that basically is more.

Q: This could be the worst in terms of growth?

A: I would tend to think so.

Q: Then the question is only about multiple, what multiple market wants to give?

A: One is that. Two is, can growth go up because of two or three things? One is basically an inorganic move. Somebody just goes and does a very big acquisition. Two is a company, as TCS has talked about investing in data centres. Let's assume that starts showing up, 2-4 years down the road. That's an opportunity.

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Third is that any of these companies unleashes some solid services around computing, which is not just about data storage, but also about computing. That's one area which can lift growth rates.

So these are some of the areas which could essentially be growth lifters, which could take growth from 7-8% in dollar terms to maybe 9-10% in rupee terms.

Q: You spoke about potential acquisitions by some of these companies to grow. You saw one big, very large acquisition by Coforge, and we've seen the market derating the stock to some extent, and that's always been a worry in the very near term. My sense is that maybe Persistent Systems is looking for something big. Even Tech Mahindra is looking for an inorganic move. Is that something, as an investor, you will be watching out for a potential acquisition? But again, the challenge would be, if they buy something in AI, it's going to be very, very expensive. So how do you measure those things?

A: Yes, that's the dichotomy. On one hand, theoretically, an acquisition should essentially perk up growth rates, but on the other hand, so far, I can't remember any acquisition which has added meaningful value to an IT services company in the last three years, five years, or 10 years. I can't recollect. Most acquisitions, if at all, have only destroyed value or probably diluted value.

Two is like what you said, if the acquisition is targeted towards AI, it's not going to come cheap, and I don't think any of our companies are essentially in that mould of paying a very high valuation also. So to that extent, yes, in the short term, it can cheer up, but I'm not too sure whether it's going to add meaningful value.Continue ReadingTagsArtificial IntelligenceCoforgeEnvision Capitalfund managersGDPIT SectorMarket analystsNilesh Shah of Envision CapitalPersistent SystemsTCSTech Mahindra