I consider Median P/E important for an IT sector based on my investment experience in the sector since TCS IPO in 2004.
There have been instances when few IT stocks move from P/E of 15 to 30 based on momentum, only to fall back to P/E of 15 once the momentum is over. You can understand this trend in TechM stock during 2006 to 2020. Now it has become more resilient but still can go to P/E of 15 since TechM business is marginally risky business as compared to other Large Caps.
New clients and technology does keep evolving. Over a period margins start reducing as other companies also develop expertise in those technologies. Margins of few IT companies will be higher than others due to their premium charging to customers, either premium Fixed Price or premium Time & Material pricing. T&M is used only for less projects and Fixed price us used in most of the long term projects.
When IT company offers modern technology, initially it commands premium margins for those technologies, but slowly it moves towards more average margins of that company.
If ROCE of the IT company keeps improving, P/E gets elevated which is common with all industries, but it will remain within some range. This range can vary from company to company based on their ROCE, Operating Profit Margins, Consistency in Sales and PAT growth, Management Quality and IPR. TCS commands higher PE due to some of these parameters as compared to other large IT companies.
This is my personal view and I may be wrong in analysis.
| Subscribe To Our Free Newsletter |
