IT Sector Recovery Remains Elusive as Markets Trade at Rich Valuations, Says Anand Tandon

Independent analyst Anand Tandon has painted a cautious picture of India's investment landscape, highlighting persistent challenges in the IT sector and expensive market valuations. Speaking to ET Now, Tandon emphasized that the much-anticipated recovery in information technology has failed to emerge despite optimistic management commentary over recent quarters.

IT Sector Struggles Continue

Tandon believes India's IT sector faces a prolonged difficult demand environment with no clear recovery in sight. The widely discussed "second-half recovery" has not materialised and is unlikely to appear even in the first half of the next financial year. While labour code-related adjustments may not have significant long-term impact if companies can pass on incremental costs, weak global demand remains the primary concern. The analyst warned that prolonged softness in international business and muted domestic hiring could begin affecting consumer demand, particularly in discretionary categories.

Market Valuations Remain Elevated

Despite recent market volatility, Tandon cautioned that Indian equity markets are not attractively priced. He highlighted that benchmark indices continue trading around 20-22 times earnings, indicating that valuations have not corrected meaningfully. The market pain has been largely confined to the broader market segments that experienced sharp rallies earlier, requiring investors to adopt a selective approach focused on sectoral rotation rather than broad-based buying.

Sector-Specific Investment Opportunities

Tandon identified relative value emerging in capital goods and industrials—segments that have underperformed for several years—rather than sectors that have already seen substantial re-rating. In the metals sector, he noted current benefits from firm commodity prices that should translate into near-term earnings strength. Companies such as Vedanta stand to gain as long as prices remain supportive, though shareholder returns will ultimately depend on corporate governance and capital allocation decisions.

Strategic Sector Preferences

For real estate exposure, Tandon prefers an indirect approach through housing finance companies, which he considers more attractive and relatively lower-risk compared to developers. In the banking sector, he believes public sector banks still offer reasonable opportunities despite most stocks now trading close to long-term averages. Cleaner balance sheets could enable PSU banks to sustain relatively higher credit growth compared to smaller private banks and NBFCs, especially in a softer deposit-rate environment.

Tandon remains constructive on life insurance, highlighting India's long growth runway. Despite margin concerns, he emphasized that penetration remains low, policy sizes are small, and protection products are under-represented. He believes holding a basket of leading life insurers could deliver meaningful wealth creation over the next 5-10 years.

Budget and Oil Market Outlook

Expectations from the Union Budget remain muted, with Tandon suggesting that a capital gains tax cut is the only measure that could meaningfully lift sentiment. However, he does not expect such moves given fiscal constraints. In the oil sector, while refining margins have been strong, rising crude prices could hurt refiners as price pass-through may be limited. If oil prices stay elevated, upstream producers such as ONGC and Indian Oil Corporation could benefit initially, though government intervention via windfall taxes could cap upside.

Tandon advises investors to maintain caution, focus on sector-specific opportunities, and avoid assuming a broad-based earnings recovery in the near term.