2022 has not been a very good year for the IT sector. The Nifty IT index has tanked 30 percent in 2022 so far as against a 7 percent in Indian markets. The index also has underperformed the Indian markets in the past 1 year, falling 5 percent versus a 1 percent rise in Nifty.
The recent decline in the index has been on the back of concerns regarding US recession, wage hikes and supply-side pressure, despite a depreciation in the rupee.
This has led to seven stocks from the Nifty IT index falling over 40 percent from their 52-week peaks. Midcap IT stocks have witnessed a higher fall than largecap IT stocks.
L&T Tech Services and L&T Infotech have fallen the most and down 47 percent each from their respective 52-week highs. Both stocks hit their 52-week peaks on January 4, 2022. They both have also lost around 45 percent each so far in 2022.
Tech Mahindra has fallen 45.7 percent from its 52-week high of ₹1,838, hit on December 30, 2021. In 2022 YTD, it has declined 44 percent.
Wipro has shed around 45 percent from its 52-week high of ₹739, hit on October 14, 2021, and has lost 43 percent in 2022 so far. MindTree, Coforge and Mphasis have also lost between 40-43 percent each from their peaks.
Meanwhile, large-caps HCL Tech, Infosys and TCS have fallen 33 percent, 25 percent and 24 percent respectively from their 52-week highs.
| Stock | 52-week high (Rs) | 52-week high date | Fall from 52-week high (%) | YTD change (%) |
| L&T Tech | 5,955 | Jan 4, 2022 | 47.3 | 44.5 |
| L&T Infotech | 7,588 | Jan 4, 2022 | 47.2 | 45 |
| Tech Mahindra | 1,838 | Dec 30, 2021 | 45.7 | 44 |
| Wipro | 739 | Oct 14, 2021 | 44.7 | 43 |
| MindTree | 5,060 | Nov 18, 2021 | 42.9 | 40 |
| Coforge | 6,135 | Jan 4, 2022 | 41.9 | 40 |
| Mphasis | 3,659 | Oct 19, 2021 | 40.8 | 37 |
Jefferies' top pick in the IT space is Infosys with a target price of ₹1,700 given its sector-leading growth and strong execution. Meanwhile, it added that TCS is better placed among the lot and has maintained a ‘hold’ rating on the stock despite rich valuations.
In the June quarter, the Indian IT sector are likely to be dragged by margin and cross-currency headwinds amid concerns of recession in the US as well as overall rising inflation.
According to MOSL, its IT Services coverage universe should witness modest median revenue growth in Q1FY23E, rising 3.3 percent QoQ. Profit across MOSL's IT coverage universe is likely to decline by 2.8 percent QoQ.
Among stocks, TCS, Infosys and HCL Tech should deliver a PAT growth of 11.2 percent 9.8 percent and 4.6 percent YoY, respectively, while Wipro and Tech Mahindra will see a 9.2 percent and 10.4 percent YoY decline in PAT due to a compression in margins, noted MOSL.
Meanwhile, among Tier-II players PAT growth of 21 percent YoY is seen, but a decline of 6.3 percent QoQ. Coforge, Mindtree and L&T Tech are expected to lead the Tier II pack in terms of YoY PAT growth.
With valuations correcting meaningfully over the last six months, the brokerage maintains a positive stance on the IT Services sector due to a favorable medium to long-term demand outlook. However, it anticipates an impact in H2FY23 and FY24 due to elevated inflation and an economic slowdown in both the US and Europe.
"We expect near-term pressure on valuations to continue as the worsening macro commentary is expected to flow down to industry deal flow and revenue over the next few quarters, leading to a moderation in the corporate commentary. Any consequent correction should be utilized to raise allocation to the sector," it said in the report.
Like Jefferies, MOSL also continues to prefer Tier I players over their Tier II counterparts, given their relative valuation attractiveness and diversified client portfolio. Among Tier I players, It likes Infosys, HCL Tech, and TCS. Among Tier II IT, it prefers Mphasis and L&T Tech.
