IT Stocks May Remain Under Pressure in Near Term; Should you Buy, Sell or Hold IT Shares?

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IT stocks may remain under pressure in the near term as growing concerns over recession in the US and Europe could erode companies’ earnings growth. The IT sector is also among the poor performers on exchanges given tepid corporate earnings and fears of a possible recession in the US which will lead to a slowdown in the domestic IT majors.

“The Indian IT industry remains sensitive to the US and European markets, which together contributed around 86 per cent to revenue in FY22,” said a report by CRISIL.

Rate hikes by the Federal Reserve, inflationary pressures, and the evolving geopolitical developments could moderate revenue growth and are key monitorables, says the report.

According to Bloomberg consensus estimates, analysts’ revenue estimates for FY23 and FY24 have been cut by an average of 3-3.5 per cent. TCS’ earnings were downgraded by 2.62 per cent in the last three months. Earnings per share (EPS) estimates of Infosys and HCL Technologies were downgraded by 3.5 per cent each during this period. Wipro and Tech Mahindra have seen EPS downgrades by 9 per cent in three months.

IT stocks have corrected more than 25 per cent on an average since the beginning of the year. Stocks such as Wipro, Tech Mahindra, L&T Infotech, Mphasis, and Coforge have plunged more than 40 per cent since January 1.

Omkar Tanksale, Senior Research Analyst, Axis Securities, said: We believe that the IT services industry is facing some near-term challenges, leading to many IT services companies to have cut in their operating margins and may face a slowdown in North America & Europe Inflated attrition levels. The exponential rise in the demand for services led to a higher attrition rate and higher wages (employee expenses) in the last few quarters. This caused a drop in the operating margins. The potential slowdown in the world’s largest economies may witness discretionary spending cuts from clients, which leads to a slowing IT services revenue growth momentum. This scenario may put short-term pressures on the Indian IT Services Industry. However, long-term IT spending remains resilient.”

Tanksale said, “We recommend to HOLD on IT stocks in times of uncertainty.” He further recommends Infosys, Tech Mahindra, Persistent Systems, Mindtree, and Affle Ltd.

Infosys
-Robust Investment in a digital portfolio to capitalize on the demand
-Strong market share gains from the BHSI Sector and Auto Industry
-Beating the growth with its Indian peers 3 yrs in a row

Tech Mahindra
-5G rollout is a big opportunity
-Improved Enterprise business
-Consistent addition of better deals improves visibility

Persistent System
-Strong product & platform domain expertise
-The better deal pipeline, which provides strong visibility
-Proved as an ISV player
Mindtree
-Strong strategy to capitalize on the demand
-Improved capabilities in digital portfolio
-Strong capabilities in CPG & Travel Portfolio
-Reduce dependency on top client account

Affle
-Strong CPCU business model augmenting robust deals from larger logos
-Robust device addition with a larger geographical presence
-Improved margins due to higher international business

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