Is It Time To Buy IT Stocks? Here's What Market Participants Say
IT stocks have pulled back after sliding from their peak. But market participants have diverging views if it's right time to buy.
India's information technology stocks pulled back a bit after hitting the year's low in the last week of May. Market participants, however, have diverging views if it's the right time to buy.
The Nifty IT Index has tumbled nearly 23% so far this year, making it the worst performer among sectoral indices. The gauge for software services providers is down for the second straight day after a brief rebound marked by volatility.
The IT selloff underscores multiple headwinds, which began with valuation concerns. India's software services exporters face high attrition and wage pressure. And a slowdown in global growth after Russia's invasion of Ukraine also threatens to limit tech spends by clients.
A depreciating rupee, however, aids IT companies as they earn their revenue in dollars. Analysts see the Indian currency dropping to between 79 and 81 a dollar over the next few months.
IT has seen foreign investors pull out nearly $7 billion from the sector so far in 2022. That's the worst selloff by overseas buyers after $8.77 billion in financial services.
Larsen & Toubro Infotech Ltd. shed the most among tech peers so far in 2022, followed by Coforge Ltd. and L&T Technology Services Ltd. Even large caps such as Infosys Ltd., HCL Technologies Ltd. and Wipro Ltd. were not insulated from the fall.
Here's what market participants say about the sector:
'Employee Costs Have Passed The Peak'
Devina Mehra, founder, First Global
Mehra is “overweight” on IT stocks. “In 2020 when FMCG was the flavor of the month, I had said that why not IT because that has the predictable margins plus a dollar hedge plus not as high returns as FMCG but still reasonably high return ratios and yet the valuations are a fraction.”
While the IT stocks haven’t performed well in this calendar year, the rupee depreciation may help boost margins, she said. “I think their user industries will still continue to invest in, at least not cut back and the other problem which had happened for them was employing costs going up and I think we have passed the peak.”
'Right Time To Consider IT'
G Chokkalingam, Founder & CIO, Equinomics Research
Stocks have had a rapid journey from 52-week highs to lows. This is a kind of meltdown that I have not seen in a long time. Being a defensive Rupee depreciation, huge cash on the book, valuations low, I think this is the right time to consider the IT space.
Abnormal valuations of some IT stocks and overall market meltdown, (the trailing P/E of Sensex has come down), these two factors contributed to the meltdown in IT stocks.
I have 100% confidence going by history that many of these information technology firms will announce buybacks, special dividend.
'IT Stocks Not Fairly Priced'
Mehraboon Irani, Market Expert
Meherboon Irani does not see the bottom yet. While the long-term prospects of Indian IT firms are positive, he does not see the stocks "fairly priced".
"Till Infosys is at Rs 1250-1300, I will not call the market has bottomed out," he said. "The reason is the mean valuation of Infosys is 16-18. Today it is still going at 20-22 P/E. That was at higher growth assumption. If you put all these things together, Rs 1,350 is not a fair price for Infosys."
"We are at a stage where growth is slowing down, deficits are at uncomfortable levels, period of FII selling looks set to continue. The pain will be more in highly valued stocks." Irani said. "Stocks which have commanded 50-,60-times P/E, the Mindtrees, Persistents and Tata Elxsis, they are good companies, but could face pressure."
"I am absolutely positive about Indian IT companies, but there is a dearth of talent, which explains the high attrition and margin pressure".
'Big Picture Play Confusing'
Samir Arora, Founder, Helios Capital
The optimistic commentary from companies on the business holds true for one or two quarters alone, Arora said. "Big picture play is a bit confusing."
Helios has not reduced many stocks apart from L&T Tech because they had done too well for two years, Arora said. "...Even though we all agree that tech spending has to be there and tech content will go up and they have to compete, but when there is pressure on stick price or small shift in earnings, there will be some margin reduction and PE reduction."
This year, he said, Helios has reduced its tech exposure by 3%.
Godsend Opportunity To Buy IT Stocks
Deven Choksey, Managing Director, KR Choksey Investment Manager
"This is the best time to buy, a godsend opportunity," he told BQ Prime. He factors the entry of ETF into IT in the previous quarter as another factor for the slide. Deven Choksey expects markets to gain from the revival in spending cycle, new projects under production-linked incentive scheme.
