Wipro, TCS, Infosys shares: IT sector plays tricky session of cricket. Will it pass the test?

At Wednesday's high of 63,196.43, the BSE benchmark Sensex was a mere 0.60 per cent away from touching its record high of 63,583.07 level that it hit in December 2022. In contrast, the BSE IT index, the sectoral benchmark for technology stocks in India, still needed a 33 per cent rally to hit its January 2022 high of 38,713.30. Will IT stocks catch up, given just TCS and Infosys together account for nearly 14 per cent of Sensex weight?

The Indian IT sector is facing a situation – a corridor of uncertainty – akin to the first session of play in a game of cricket. It refers to an area wherein a batsman struggles the most to play a ball, said Nuvama Institutional Equities. The batsman knows that once the tricky ‘corridor of uncertainty’ passes over and the sun is out and shining, they can score loads of runs, it said.  Indian IT services companies are facing an uncertain and overcast environment amid weak global macros, it noted citing project delays.

"But we believe, as soon as this uncertain period is over, Indian IT services shall have sunny days driven by strong demand for cloudification and digitisation. We stay positive on IT services, Nuvama said.

The IT index corrected significantly (down 24 per cent since January 2022 and has underperformed the broader index (up 6 per cent) since then.

"Sectoral valuations, particularly after Infosys’s post-results fall-off, are now within striking distance of pre-Covid levels, despite the medium-to-long term demand environment being much strong than it was pre-Covid. Accordingly, we argue a bottom has already been made, and the sector offers significant upside potential from current levels," Nuvama said.

The recent guidance by US-based EPAM has raised concerns over discretionary spent in the IT sector. Kotak Institutional Equities said the impact on EPAM was amplified by its high exposure to discretionary spending and certain company-specific factors and that Indian IT firms have a more balanced portfolio between discretionary and maintenance spending.

"Indian IT firms will also benefit from cost take-out programs and mega-deals. However, these positives are outweighed by the broader caution in spending, especially in the impacted verticals," it said.

Nuvama cautioned investors and said one needs to pick stocks selectively since it is not a rising-tide-lifts-all-boats environment.

"We retain LTIMindtree as our top pick, and maintain a ‘BUY’ each on Coforge, TCS, Infosys and Persistent. Meanwhile, we are upgrading HCL Tech to ‘Buy’," it said.

For FY24, Infosys guided for FY24 revenue growth of 4-7 per cent in CC terms. HCL Technologies guided for 6-8 per cent growth, with IT services expected to grow at 6.5-8.5 per cent. Wipro, on the other hand, suggested a June quarter CC sequential growth of  minus 3 per cent to minus 1 per cent.

HDFC Securities said it sees low risk to guided mid-point of Infosys and HCL Tech, based on relative premium to global peers and the enterprise scorecard.

"Our base case is a flat sequential growth trajectory for the sector in Q1FY24E and progressing onto long-term averages over Q2 to Q4FY24E; downside risk is more near-term rather than medium-term. We continue our preference for LTIMindtree within large-cap IT, Persistent Systems within midcap IT, and Zensar moves up in the pecking order," it said.
  

BNP Paribas India's analyst for IT & auto sector, Kumar Rakesh, said BNP's proprietary index—BNP Paribas IT services industry outlook index (BNPP IOI)—indicates that deal wins remained robust in the March quarter and suggested that accelerated bookings growth is a positive sign for the demand environment and is in line with what Indian IT services companies have been reporting. He noted that the increasing number of cost efficiency and vendor consolidation deals are offsetting the reduction in discretionary spends.

"IT Services companies have turned cautious in their near-term revenue growth outlook, given fears of a macro slowdown, with most companies expecting a recovery in 2HFY24.

Shares of TCS a down 3 per cent in the last one year. Infosys has plunged 15 per cent during the same period. Wipro shares declined 14 per cent, Tech Mahindra slipped 3 per cent while shares of HCL Tech have bucked the weak trend, rising 10.33 per cent.

"We believe weakness in revenue growth in CY23 is largely priced in the

stock prices at current valuations (NIFTY IT is trading at 22x on 1-year forward EPS, 2 per cent premium to 5-year average P/E). We continue to prefer Infosys and Persistent Systems, followed by LTIMindtree and TCS," it said.