The IT pack is fairly upbeat in early trade today after weeks of being battered. The Nifty IT Index is down over 15% in the last 1 month but leading brokerage firm Nuvama says “ the valuations of all stocks highly attractive.” They now have a ‘Buy’ rating on all the Top10 IT Services companies. They prefer Coforge, LTM, Persistent, Mphasis, Infosys and TCS.
According to Nuvama, the concerns around Gen-AI disrupting the IT services model are exaggerated. They pointed out that “the IT services model is here to stay, and the Gen-AI disruption would only lead to bigger opportunities for them.” Post the recent sharp correction, they consider the valuations of all IT services stocks highly attractive.
IT stocks may deliver strong returns in 12–15 months: Nuvama
Making a case for the IT stocks now, Nuvama expects investors to “make handsome returns in any/all of these stocks from current levels over the next 12–15 months.”
The brokrage had positive view on six of the Top-ten IT Services companies and upgraded the remaining four—HCL Tech, Wipro, Tech Mahindra and Hexaware—with the current valuations being highly attractive.
Coforge remains the top pick for Nuvama. LTM, Persistent, Mphasis, Infosys and TCS are also among their key preferences.
Here are 3 reasons why Nuvama is positive on IT sector
#1. Sharp correction opens buying opportunity in IT stocks
Nifty IT has declined 21.15% so far this year and nearly 15% the past month. Nuvama, however, believes that the recent sharp correction has made valuations more attractive, creating a potential buying opportunity.
Nuvama compared this sharp pace and magnitude of stock price reactions in this cycle with that seen in 2015-2018. In the last cycle of 2015–18, the sector largely underwent a time correction as well as some price correction.
They believe that this contrast is due to two factors – “Gen-AI is likely to be much more disruptive in nature than the digital technology, hence giving rise to a bigger and sharper value erosion.”
They added that the “market dynamics and participants have changed a lot between the two cycles; the current market is highly volatile and has an abundance of hedge/HFT funds that accentuate the stock price reaction (either ways).”
Notwithstanding this, Nuvama believse that while this “cycle is much more disruptive than earlier ones, the eventual outcome will be the same. Gen-AI would give rise to revenue compression in the early years, but eventually it would only expand the TAM for Indian IT companies that would start re-capturing market share once the technology becomes mature.”
#2. IT sector has survived disruption before
The primary concern behind the recent correction has been the fear of Gen-AI affecting the long-term business model of sectoral companies. The recurring announcements by various players in the Gen-AI ecosystem (Anthropic, Palantir, OpenAI, etc) are leading to concerns on Gen-AI making various segments of IT Services companies redundant and hurting their growth in the near as well as long-term.
Nuvama however, pointed out that over the last two decades, there are multiple instances of a similar narrative —that the technology disruption will render the business model of IT Services redundant. They highlighted how every time the “tech disruption has played out to the advantage of these companies, eventually expanding their TAM.”
The only difference this time has been the “sharp stock price reaction this time around—as compared with earlier cycles,” Nuvama added.
#3. Limited scope for further earnings cuts: Nuvama
Nuvama also noted that the earnings downgrade cycle for the IT sector appears to have bottomed out. Over the last two quarters, there have been almost no EPS downgrades for most companies, except Hexaware Technologies. This suggests that revenue and earnings estimates are already conservative, leaving limited room for further cuts.
Conclusion
Nuvama cited examples of several previous instances when concerns have been raised about the future of the Indian IT Services industry . This time too Gen-AI is touted to be the death knell for the Indian IT Services industry , and change the way IT Services business is conducted. However, they do not envisage “it to be any different from last time, and reckon Indian IT firms shall emerge stronger from this technology disruption, as they have always done before.”
Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.