The price-to-trailing earnings (P/E) multiple of the top five companies had declined to 12.9 times (12x) at the end of September, the lowest since the 2008 global financial crisis, when the valuation had dipped to 9.5x at the end of December that year.

For comparison, the industry trailing P/E was 23.3x at the end of December last year and, on average, it has been 23.2x in the past 10 years.

The trailing P/E of the BSE Sensex had declined to 19.2x at the end of September, down from 23.5x at the end of December. It is the lowest in the past 10 years on a quarterly basis. The valuation discount for IT services relative to the benchmark BSE Sensex also hit a record high at the end of September.

Analysts say that the record low valuation has triggered a “tactical buy” on the part of investors, causing a “surprise” rally in IT stocks. This also contributed to a recovery in the broader market after its dismal showing during the first nine months of this calendar year.

“The trailing P/E of top-tier IT services companies declined to 12-15x from 30-35x till three years ago. This is an extremely attractive valuation, given that most of these companies continue to sit on large amount of free cash and return generous amounts to shareholders every year through dividends and share buybacks,” said G Chokkalingam, founder and chief executive officer, Equinomics Research & Advisory.

According to him, rupee depreciation favours companies in this sector because it translates into higher revenues and profits in rupee terms. The combined market capitalisation of the five is up 16.3 per cent month-to-date in October, contributing to a rally in the benchmark indices. It jumped to around ₹20.77 trillion on Friday as against ₹17.86 trillion at the end of September.

The BSE Sensex is up 1.9  per cent month-to-date in October and closed at 73,852.9 on Monday as against 72,480.3 at the end of September.

For comparison, the BSE Sensex declined 15 per cent during the first nine months of this calendar year while the combined market capitalisation of the top five IT companies had declined by 33.5 per cent during January and September this year.

The trend is similar in the 10-stock Nifty IT index, which is up 13.8 per cent month-to-date in October, while the Nifty 50 index rallied 1.2 per cent in the period.

The big five together account for 81 per cent of the combined market capitalisation of the 10 Nifty IT companies and nearly 90 per cent of their combined net profits.

Analysts, however, doubt the long-term viability of the current rally in IT services stocks, given the apparent lack of growth drivers for the sector. “None of the IT companies is likely to grow its revenues and earnings at a 5 per cent annualised rate in dollar terms on a sustained basis. Most companies are struggling to grow at 2-3 per cent in dollars, which rules out a sustained rally in their share price,” said Chokkalingam.

According to him, the current rally could lose momentum once the industry trailing P/E reaches 16-17 times.

It is a matter of speculation if the frontline IT can start showing strong earnings in the coming quarters.

Their low valuation provides ample opportunities for value hunters.