After a 20% fall in 1 year, is it time to accumulate IT stocks? 6 analysts answer

Updated: 21 Mar 2023, 02:58 PM IST

On the back of the correction in the IT sector and is the time right to accumulate stocks from the space, should one wait longer before adding more or is it time to sell? Let's see what 6 experts have to say:

The Nifty IT index has fallen over 20 percent in the last 1 year. The decline comes after a massive surge post the COVID pandemic. Between January 1, 2020, and March 31, 2022, the Nifty IT index rose by approximately 144 percent, while the Nifty 50 index climbed by 44 percent. However, since March 2022, the index has shed over 21 percent.

In the last 1 month, the index has lost around 9 percent on the expectation of a slowdown in IT spending due to high inflation and interest rate hikes in the US and economic slowdown in Europe. In comparison, the benchmark Nifty is down over 4 percent.

Experts believe that the sharp run-up in inflation globally, and the resultant aggressive monetary policy actions by central banks in the developed economies (the major market for IT companies) to contain inflation resulting in recessionary expectations gradually gaining ground impacted the entire sector. The expectations of a slowing economy transforming into lower digital spending were reflected in the price performance of domestic IT companies.

Nifty IT one year trend

Now, on the back of this correction and is the time right to accumulate stocks from the IT space, should one wait longer before adding more IT stocks or is it time to sell? Let's see what 6 experts have to say:

Deepak Jasani, Head of Retail Research, HDFC Securities noted that given the lower valuations, IT stocks now seem better-positioned due to rupee depreciation, more broad-based cost take-out programs, good delivery model and the ability to offer competitive pricing across a whole range of competencies. However, uncertainties remain on the topline growth front due to global growth slowdown fears and heightened competition, he cautioned. But one can shortlist a few stocks and accumulate them over the next few quarters, he advised investors.

Omkar Tanksale, Senior Research Analyst, Axis Securities also remains bullish on the long-term prospects of the IT space.

"The investor should look at the long-term perspective rather than looking at the short-term correction. We believe many businesses are becoming system-driven, implicating higher dependency on these IT services. In the case of the recovery, IT services will be the first sector to recover as it has strong demand, a healthy balance sheet, and strong free cash flow generations," he said.

Mohit Jain, Research Analyst, Anand Rathi Institutional Equities believes that it's time to start accumulating IT stocks. While more correction is always difficult to predict, one can offset some of these risks by building the desired position over say 6 months rather than at once, he stated. This will help absorb the volatility in current prices. Also, from a timing standpoint, Nifty IT is down 20 percent in the last 12 months and 27 percent from the peak. This, in my opinion, is a good starting point, suggested the expert.

Sunil Damania, Chief Investment Officer, MarketsMojo anticipates that the IT sector will perform exceptionally well. There are a few reasons for this, he noted.

"The recent allegations of corporate governance issues involving one of the biggest companies have alarmed investors. They seek to invest in well-managed businesses with a lower probability of experiencing corporate governance issues. Fortunately, India boasts some of the best-managed IT companies that have reported growth despite several boom-and-bust cycles. Further, investors also tend to prefer companies with low borrowings when interest rates are on the rise. However, for companies with large cash and cash equivalents, higher interest rates can improve their treasury revenue. Another reason why IT firms should do well is the falling attrition rates. This will help IT companies to improve margins. Finally, due to the IT industry's underperformance in FY2023, their values have become attractive, which can provide investors with capital appreciation," he explained.

On the contrary, Vinit Bolinjkar- Head of Research - Ventura Securities feels that the tighter-than-expected monetary policy by the US Fed in the backdrop of higher inflation and the possibility of a recession in H2CY2023 is likely to impact the business performance of the Indian IT companies. So he recommends holding the stocks and avoiding any further accumulation.

Suman Bannerjee, CIO, Hedonova also advises staying away from the sector for now. The dollar index is at its highest point ever and there is a decline in the cards. Most IT companies receive subcontracts from US finance and technology firms and both sectors are under pressure, he warned.

"Add this moment with large technology and finance companies doing job layoffs, they will be focused on their core products for which they have the talent in-house. Healthcare spending is also reducing after the bump during Covid. The order pipeline of Indian IT companies will shrink and the Dollar will most likely fall. A lot of orders are also bound to get canceled. I would stay away from the space for the next two quarters at least," he suggested.

Largecap IT vs midcap IT stocks

Jasani of HDFC Securities said that he likes stocks in both the large-cap and midcap space. "We feel Infosys from large Cap and Persistent, Mphasis and Cyient from Midcap IT space could do well though the buying may be spaced out over the next few months," he advised.

Tanksale if Axis Securities believes one should stick with large-cap IT packs, compared to mid-cap IT companies, because large-cap IT companies have comparatively larger deals that provide better sustenance in difficult times. Many large client accounts have a higher dependency on these IT services companies compared to midcap IT companies, he added.

Meanwhile, Jain of Anand Rathi prefers a combination of both. In large caps, he likes Tech Mahindra and LTIMindtree while in mid-caps, he likes Mphasis and Persistent Systems.

Bolinjkar recommends avoiding midcap IT stocks and holding only large-cap names such as TCS, HCL Tech, Infosys, Wipro and Tech Mahindra.

Suman Bannerjee, CIO, Hedonova also advises staying away from the sector for now but if you put a gun to my head, I would focus on IT firms that derive most of their revenue from India, which are mostly mid-cap IT stocks, he said.

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First Published: 21 Mar 2023, 02:58 PM IST