The key question on the top of the mind of investors of Indian IT is whether the current downturn is cyclical or structural. We believe it is cyclical for select few with ability to grow traditional business and participate in digital, and perhaps structural for rest. Stock picking becomes all the more important given this backdrop. We prefer picking bets and adding at current levels given safety-in-multiples rather than waiting for earnings upgrade cycle, which is difficult to catch.
Infosys is our top pick
At present, Indian IT Industry faces three broad headwinds: weak IT spends in financial services and healthcare verticals coupled with rise in insourcing or expansion of captives by select financial services clients, deflationary impact of automation on revenues. Automation savings built in large deals/renewals puts downward pressure on revenues; downward pressure on contract values has been an ongoing pattern but has accelerated in the past 12-18 months, and lack of adequate participation in digital. In view of the above, we dissuade investors from taking a homogenous view on Indian IT. It is important to assess companies based on parameters — broader set of capabilities. TCS ranks high and HCLT is the weakest among large caps, level of automation and industrialisation of services.