Over the past few years, IT stocks have been the major outperformers, aided by steady recovery in the US and the falling rupee. While the Dow Jones Index has gained 80% in the past five years, the rupee has depreciated by 27% against the US dollar during this period, giving the tech companies a double advantage.At the same time, lack of alternatives for investments owing to a slowdown in India led to major fund flows in the export-focused IT sector. However, the past may not be the reflection of future. Although most of analysts remain ‘Overweight’ on the tech companies, according to Bloomberg, the number of analysts changing their recommendations to negative could rise quickly.Most of the gains in the stocks such as TCS HCL Tech and Tech Mahindra came in the second half of FY14. In 2013, the Indian rupee plunged sharply, and touched its all-time low of 68.9 against the dollar in the end of August from 55 at the beginning of the year.As anticipated by the Street, this led to a significant expansion in the margins of these tech companies, leading to sharp earnings growth in the second half of FY14. Take for instance, TCS’ profit-after-tax growth for the second half of FY14 was 50% as compared to 25% in the first half. A similar trend was visible in the earnings growth of the other tech companies as well. The earnings growth was not only driven by revenue growth but also by margin expansions.Around 40% of the total growth in the second half of FY14 was driven by margin expansion. Although the revenues are in dollar terms, over 90% of the cost for these companies is in rupee terms. Indian rupee had corrected by 15% year-onyear in the past nine months of FY14 compared to the corresponding period a year ago. The sharp fall in the rupee began only post June 2013 quarter, hence good results for the tech companies till the current June 2014 quarter.But now, the rupee advantage is no more there. Even if the rupee has to stabilise at 61 against the dollar, it will still be below the last year levels by 3-4%. This means the lower base effect in the earnings of the tech companies will diminish in the coming quarters. Although the revenues of the tech companies may continue to grow in the dollar terms, the earnings growth will be much lower compared to the previous quarters.This can result in investors moving to cyclical sectors as the Indian economy begins to revive. The period from 2006 to 2008 will be more appropriate for comparison as that phase shared a similar shift in the earnings parameters. From 2006-2008, the rupee was in the appreciating trend. The rupee had appreciated from 45 in the beginning of 2006 to 39 by the end of 2007.At the same time, Indian GDP was growing at above 8%, which resulted in institutional flows in several sectors rather than chasing selective sectors. Although, the IT companies delivered over 25% growth, the earnings multiple declined sharply, as the 25% growth was much lower than that of previous year’s which was above 40%.Again, for instance, TCS’ price-to-earnings multiple fell from 42 in February 2007 to 18 in January 2008. Similar was the case with other IT companies. From its high in February 2007, BSE IT Index corrected by 27% in one year, while Sensex had gained 25%. In two years, the BSE IT index corrected by 60%.This time, the fall may not be as severe, as the US economy continues to do well, but don’t be surprised if the tech companies underperform the overall markets for the next two years.