IT stocks busy taking revenge as investors ignore downgrades after Q3 results

NEW DELHI: While it may be too early to call it a trend, the worst sectoral performers of 2022 - IT stocks - are bouncing back and how! The IT barometer, which ended a forgettable year with a 26% crash, is now the top gainer in the first fortnight of 2023.

After the quarterly results, TCS saw 4 downgrades, Wipro 3 and HCL 2 in brokerage target prices in the last one month, Trendlyne data shows. However, so far in the first two weeks of the new calendar year 2023, HCL is up 7%, TCS 3.7% and Infosys 2%. In the meantime, Nifty IT is up over 3% while the Nifty has lost 0.3% of its value during the period.



"We can see some bottom-fishing happening in IT stocks. The selling pressure has clearly come down now. It appears that IT stocks have bottomed out now and I don't think there would be further downfall," said Kranthi Bathini of WealthMills Securities.

The performance of IT stocks is also in sync with Nasdaq which has outperformed by rallying over 6% in the last 2 weeks.

Global brokerage Jefferies' analyst Akshat Agarwal said the Q3 results offer limited reasons to change their cautious view on the sector.

"A sharp slowdown in net hiring, muted growth outlook in 4Q and a potentially slower conversion of bookings to revenues points to a sharp growth moderation for Indian IT firms. However, falling attrition and ongoing improvement in the employee pyramid should support margin recovery," he said.

Warning of uncertain times ahead in the IT sector, Agarwal said in a report that TCS' Q3 performance was the strongest, Wipro the weakest among all IT firms that have declared Q3 results so far. Infosys is the only IT stock on which Jefferies has a buy rating at this stage.

"After the Q3 results so far, we expect aggregate revenue for Indian IT firms to sharply moderate from 14.6% YoYcc in FY23 to 6.8% YoYcc in FY24," Jefferies said while warning that as growth expectations moderate, further derating in PE multiples is likely as seen in the past.

The IT sector is now trading at a 15% premium to Nifty vs a historic average of 8%, which analysts say restricts the upside potential.

HSBC Securities' Head of Research Yogesh Aggarwal says while the margin pressure has now started to recede, the sector is now on its radar but the demand remains unpredictable.

"In light of a likely impending business slowdown we are not overly exuberant on the sector. On a more positive note, most funds seem underweight the sector and INR depreciation can provide resilience to earnings," he said.

For Macquarie, top pick remains HCL Technologies as the global brokerage firm sees the IT major poised for a significant rerating as investor concerns about the sustainability of its growth recedes over FY24. "We see it being close to if not the growth leader among India IT services largecaps," it said while giving a target price of Rs 1,500 on HCL Tech.

Within the midcap IT segment, Persistent Systems and LTIMindtree are its top picks.

(With data inputs from Ritesh Presswala)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)