Risk reward unfavourable for IT stocks, says Investec

Mumbai: Brokerage Investec said the risk reward for information technology (IT) stocks is unfavourable after their recent run-up on expectations of a recovery in the sector. While October-December is the weakest quarter in the year due to a lower number of working days, furloughs and US elections, the firm said there are no catalysts to support stocks at current valuations. Investec downgraded Infosys and Wipro to sell.

"We see no catalysts to support stocks at current valuations and remain cautious on the sector overall," said analysts at Investec in a note. It said Zensar and KPIT Tech offer "relative comfort" among midcap IT stocks.

The Nifty IT Index surged 19.6% in the last 6 months against an up move of 11.1% in the benchmark Nifty Index in the same period. Investec said that the surge in the IT stocks has been in anticipation of a recovery despite the earning downgrades.

The brokerage said valuations of IT services stocks are at or above their average valuations after Covid between April 2020 and March 2022, when growth and profitability were high.

"We believe both the revenue growth rate and margin performance seen during Covid are unlikely to recur going forward," the analysts said.