TCS, Infosys, Wipro & Tech Mahindra slip up to 30% in a year; time to look for mid-cap IT stocks?

IT majors Infosys and Tata Consultancy Services (TCS) posted lower-than-expected financial results last week, showing the challenges faced by the industry amid the ongoing slowdown in the developed economies. While Infosys generates more than 97 per cent of its revenue from North America, Europe and the rest of the world (ROW), TCS garners around 95 per cent of its revenue from the Americas, Europe and ROW. The weakness is also visible in their stock prices which have underperformed the benchmark equity indices in the last 12 months.

Shares of Infosys and TCS have cracked 22.2 per cent and 11.30 per cent in the last 12 months till April 18, 2023. On the other hand, the BSE Sensex gained 4.5 per cent during the same period. Other large-cap IT majors including Wipro, HCL Technologies and Tech Mahindra have also declined 32 per cent, 4 per cent and 24 per cent, respectively, since April last year.

With a gain of 68.50 per cent, Cigniti Technologies emerged as the top gainer in the IT pack in the last one year. Shares of the small cap company jumped to Rs 761.85 on April 18, 2023 from Rs 452.25 on the same day last year. D-Link (India) (up 64.50 per cent), KPIT Technologies (up 57.90 per cent), Accelya Solutions India (up 51.60 per cent), Nucleus Software Exports (up 35.20 per cent) and Sonata Software (up 35.20 per cent) stood among other major IT gainers from the broader markets.

Considering the present weakness in the IT sector, is it makes sense to look for IT firms from the broader space or to start SIP in the IT sector?

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S K Hozefa, CEO, Tradeplus said, “Given the softness in earnings from the large IT firms, investors may consider diversifying their investments into other options in the IT sector including Nifty IT and IT ETFs, as part of a long-term investment strategy.”

Shrey Jain, Founder and CEO, SAS Online said, “There are still positive opportunities to consider in the IT space. Despite recent challenges in growth, it's important to note that analysts have been giving buy calls on IT in the last six months, and there may be potential for a rebound. Additionally, with recent corrections in valuations, some IT companies may now be reasonably priced.”

Jain further added that investing in midcap IT firms that are focused on the domestic market can have potential advantages. “One may prefer to explore other sectors that have the potential to lead the market to all-time highs, such as capital goods, infrastructure, auto and banks. It's always good to diversify and consider different investment options that align with your investment goals and risk tolerance,” Jain said.

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When considering investing in IT stocks, market watchers believe that it is important to thoroughly assess several key factors to make informed investment decisions. One must evaluate a company's market position, including its competitive landscape, market share, customer base, price-to-earnings (P/E) ratio and the overall market to assess whether the stock is reasonably priced.

Sharing her advice with investors, Nirvi Ashar, Fundamental Analyst, Religare Broking said, “As far as the IT sector is concerned, some caution is warranted post the results of both companies TCS and Infosys. The management was skeptical regarding the near-term growth because of the uncertainty in the US economy and challenges in the BFSI as it generates the majority of the revenue from them. We will wait for other companies’ results but this is a good opportunity for investors looking to invest in the IT sector. They can start accumulating stocks at current levels with comfortable valuations.”

HCL Technologies and Wipro are slated to announce their earnings on April 20 and April 27, respectively. According to Motilal Oswal Financial Services, revenue growth for HCL Technologies and Wipro are likely to remain weak at 0.6 per cent and 0.5 per cent QoQ. “We expect HCL Technologies to report muted growth due to a seasonal drag in HCL Software and margin to decline 150 basis points QoQ largely due to a seasonal decline in HCL Software,” the brokerage said.

“One can look at mid-cap IT but we suggest being selective because of its expensive valuation. Besides, from a 1-2 year perspective, we would still prefer investment in large-cap stocks,” Ashar said.

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