The IT sector is on the cusp of a major transition, which could be painful. Investors should stay away from the sector for some quarters to see how the sector evolves, said Karan Aggarwal, co-founder and CIO of Ametra PMS- a quant-based PMS and portfolio manager- in an interview with Mint.
“We would advise investors against any rush to buy the dip,” Aggarwal said.
More than IT, Aggarwal’s biggest worry is the discretionary consumption story, which he expects to remain stagnant for the next few years due to AI-led disruption, potentially triggering white-collar layoffs, deep cuts in pay packages, and the shrinking of the middle class.
Edited excerpts:
How do you see the current market structure? Can it remain range-bound in the short term?
Over the last eight months, large- and mid-cap stocks have been in a period of consolidation.
On the other hand, the broader market has seen a sharp price correction, with the Smallcap 100 and microcap 250 benchmarks down by nearly 15%-20% from their July 2025 highs.
Market breadth is poor with nearly 80% of Nifty 500 constituents delivering negative returns since the last peak of Sep 2024.
A major problem for markets is a major disconnect in valuation and earnings growth.
Despite a sharp price correction, the Smallcap 100 index is trading at a P/E multiple of 26 times on a historical basis – a good 30% premium to the comfort value of 20 times.
The Midcap 100 index is trading at an abnormally high P/E multiple of 34 times, suggesting either an abnormally long-term correction of 2 to 3 years or a sharp price correction.
Though the Nifty 50 P/E multiple is relatively sober at 22-23 times on a consolidated basis, historically, three-year returns have been in the single digits at these valuations.
Generally, these valuations have to be justified by a minimum 15-20% growth rate.
If results from Q3FY26 are considered, trailing twelve-month (TTM) earnings per share (EPS) for Nifty 50 have gone down by 0.5% with broad Nifty 500 TTM EPS growing by merely 1%, translating to an annualised growth rate of 7%-8% in an optimistic scenario, which does not justify rich valuations.
Technically, charts are also looking weak, as the Nifty 50 has breached the 200 DEMA line multiple times, which has historically been a bearish signal.
Having said that, in the absence of any major global trigger, markets are expected to trade in a tight range for one to two quarters and would wait for a potential EPS re-rating to decide on a breakout move.
In 2023, investors were rewarded for their patience in FY 24 Q2, and history might repeat.
However, if negative global triggers are combined with currency depreciation, there is enough pressure on markets to trigger a short-term downside breakout.
Can Nifty 50 surpass 27k by the end of March 2026?
Usually, you need strong geopolitical developments or an EPS re-rating for a breakout move.
We can rule out an EPS re-rating due to troubles in the IT sector and the fact that the next earnings season will be in April 2026 only.
India-US was supposed to be a breakout move, but it is largely factored in.
At present, hopes of scaling to 27,000 are resting largely on global risk-off trade on account of surprise US Fed rate cuts, the US-Iran thaw, and/or any reliable report casting doubt on AI’s ability to impact Indian IT service providers.
In the absence of further de-rating, we believe the Nifty 50 can deliver 8%-10% returns from current levels in calendar year 2026 (CY26), but investors might have to wait a few more months for a breakout move.
What should be our approach for the IT sector?
If all the fears linked to AI disruption in the current business model become reality, we could see nearly 50%-60% erosion in IT companies’ top lines.
Even in an optimistic scenario, we are looking at a 25%-30% erosion due to economic woes in the US alone.
Coming to the trading part, even before the AI-related news flow, the Nifty IT index has been in a time correction since 2024, and topline growth has stagnated in the mid-single digits over the last few quarters.
We believe the business model of IT companies will undergo a painful transition from a man-hour revenue model to an outcome-oriented revenue model, resulting in modest EPS impact and fatter margins over the next few years.
We would advise investors against any rush to buy the dip. It would be more prudent to wait for a few quarters to assess the efficiency of IT companies in addressing these novel challenges.
Existing investors with large positions, i.e., an allocation of greater than 10% to IT, can use any dead cat bounce to lighten their allocation.
Does consumption as a theme still look attractive to you? Do you expect it to generate alpha in 2026?
Frankly speaking, we are not much worried about IT sector stocks in the context of AI-related disruptions.
Our biggest worry is the discretionary consumption story, which might remain stagnant for the next few years.
Even if the AI theme plays out partially, India can experience massive white-collar layoffs, deep cuts in pay packages and a shrinking of the middle class till 2028.
These developments can lead to unforeseen growth and profitability challenges for discretionary spending-linked sectors such as NBFCs, banks, real estate, automobiles, hotels, airlines and the gig economy, which can have a further multiplier impact on consumption.
We are more focused on sectors such as consumer staples, pharma, power, infrastructure, and rural consumption, which are relatively insulated from employment trends in the IT sector and from discretionary spending.
PSU banking space has delivered strong returns over the last six months. Do you expect the positive momentum to continue?
PSU banking has been a re-rating story for the last five years, with the entire sector wiping out its NPAs and operating like normal banks.
In the 2010s, PSU banks traded at a 70%-80% discount to their private-sector peers.
This gap is now largely with valuation discounts reduced to 20%. Turnaround of PSU banks is largely completed now, NII growth moderating to single-digit in Q3FY26– at par with private banks – from highs of 15%-20% till a few quarters ago.
As some valuation comfort remains in these entities, with privatisation as another trigger, PSU banks still have some upside left, but the risk-return ratio is not as attractive as it was a few quarters ago.
FIIs have started buying, but selectively. Do you expect this trend to continue?
FIIs are buying in sectors where they find valuation comfort. Buying in the last 12 months has been concentrated in banking, NBFCs, and the auto sector, where discounts of 20%-50% relative to broader markets have been observed.
Looking at historical trends, India’s underperformance vis-à-vis global peers has reached a reversal point.
In the event of a global equity crash and valuation moderation, we can expect a return of FIIs across the breadth of Indian equity markets.
Till then, we might see stock-specific buying in areas where FIIs like a favourable risk-return proposition.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
