FIIs offloaded Rs 4,550 crore of IT stocks in 4 months. Should you press the sell button too?

Amid ongoing geopolitical tensions and slowdown, foreign portfolio investors (FPI) are showing a bearish sentiment towards the Indian IT sector. 

They sold shares worth Rs 4,550 crore from the IT sector during January-April 2024, according to NSDL. The BSE IT index plunged more than 5% YTD till May 9, 2024, while the benchmark BSE Sensex gained 0.23% during the same period.

Shares of IT majors such as Infosys and HCL Technologies declined 7% and 10%, respectively, YTD. Wipro, Tata Technologies, Birlasoft, Mphasis and LTIMindtree also retreated between 4% and 26%. On the other hand, Tata Consultancy Services (TCS) gained 4% during the same period.

With the fall in information technology stocks, FPIs assets under custody (AUC) in IT stocks plunged to Rs 5.64 lakh crore as of April 30, 2024, from Rs 6 lakh crore on December 31, 2023.

The stance for the IT sector is looking bleak for the ongoing financial year. Brokerage Prabhudas Lilladher believes that the revenue growth outlook for FY25 has been discouraging with Tier-1 names expected to report below mid-single digit growth (average), while Tier-2 companies are capping their revenue growth to high-single-digit.

“Unlike FY24 outlook, the companies have become more conservative in FY25 guidance, and are baking in anticipated delays in executions and project closure activities. If the spending recovery coexists with an anticipated macro recovery in the near-term, then we might see an upward revision to the guidance for the companies as they progress through the year," Prabhudas Lilladher said in a report.

The report added that FY24 ended with another quarter of weak performance within IT services. Although the revenue growth was largely in line or a tad below consensus, the margin improvement or earnings growth was disappointing for selective names.

“Median revenue growth for the IT sector (Tier-I + Tier-II) came in at 0.7% QoQ CC, wherein Tier-2 companies continued to outpace Tier-1 names and have reported median CC growth of 2.1% QoQ, while Tier-1 revenue growth came in at -0.6% QoQ CC,” the brokerage said adding the demand environment remains unchanged in Q4 with large global enterprises continue to stay cost-focused and reprioritise areas of investments that are critical to their core operations and that can drive immediate return on investment (ROI).

Prabhudas Lilladher advised investors to keep a selective stance on the Tier-1 names that are carrying diversified business mix, and have built a strong ability to capture the current enterprise spends. The brokerage has a ‘Buy’ rating on HCL Technologies with a target price of Rs 1,550. On the other hand, it has an ‘Accumulate’ rating on LTI Mindtree and TCS with target prices of Rs 5,015 and Rs 4,360, respectively.

Vinod TP, Research Analyst, Geojit Financial Services said, “The Indian IT services industry is poised to continue moderate revenue growth in the near term on concerns over macroeconomic conditions and inflationary headwinds. However, operating profits are expected to improve with cost optimisation measures.”

“Given the likelihood of volatility due to concerns over macro headwinds, in the near term, it is advisable to focus on high-quality stocks, particularly those operating in niche areas that can showcase strong revenue growth. For long-term investors, adopting an accumulation strategy is recommended. Focusing on companies with strong balance sheets, particularly those involved in AI and Gen AI technologies with strong deal wins, and those companies de-risking by diversifying across different sectors, could be a better pick,” he said.