Indian IT stocks have seen sharp correction in 2022 due to broad market weakness and increasing concerns from a protracted US slowdown on IT spending. The Nifty IT index has plunged around 25 per cent so far this year and the month of May was particularly bad for IT stocks, as reflected in 6 per cent drop in the index. The main reason for such a fall was persistent selling by foreign portfolio investors (FPIs). According to the data released by NSDL, FPIs sold stocks worth over Rs 16,000 crore from the sector amid volatile rupee. The correction has resulted in valuations cool off after the strong re-rating through the past 18 months, according to analysts at JM Financial Services.
“We continue to be backers of ‘higher than pre Covid growth/multiples’ for Indian IT with increased resilience of global delivery and increasing attractiveness for ‘offshore delivery’ as clients seek more cost efficiencies in a high inflationary environment,” the brokerage said. HCL Technologies, Infosys remain JM Financial analysts’ top picks among Tier I techs; PSYS, MPHL amongst mid tier techs, and ZENT, FSOL amongst small cap techs.
IT Sector growth to remain above pre-Covid levels despite cross-currency headwinds
According to JM Financial analysts, cross currency headwinds will likely pull reported USD revenue growth lower by 175-250 bps in FY23. “Indian tech companies enjoyed favourable cross currency gains through both FY21 and FY22 which aided reported USD revenue growth for the periods. However currency moves in recent months will likely pull down reported USD revenue growth by 175-250 bps across Tier I techs,” they said. However, while the adverse cross currency moves will drive cuts to reported USD revenue growth numbers for the Indian techs, the net impact on operating margins will still be slightly positive if the current exchange rates were to hold, they added.
IT spending and offshore led growth may remain resilient despite macro concerns
There is increasing concern about a hit on client’s IT spending due to the weakening global macro hit by higher inflation further compounded by the geopolitical crisis in Ukraine. The increasing concerns on US slowdown/recession is leading to worries about the potential impact on client IT Spending. Analysts believe that while there is some merit to that concern, the commentary from both Indian Techs as well as global techs in recent weeks seems to suggest that clients continue to remain committed to their tech initiatives.
“We continue to be in the camp that believes that growth for Indian IT will remain above ‘Pre Covid levels’. The thesis is based on the fact that Covid has reaffirmed the faith in global delivery, with the current inflationary environment and tight labour market conditions all the more catalysing client demand to seek more efficiency gains,” they said.
Top stock picks
The brokerage continues to prefer selective names. Amongst Tier I techs, HCL Technologies and Infosys are their top buys. The order of preference amongst Tier I techs is HCL Technologies>Infosys>Tech Mahindra>Wipro>TCS. Amongst mid-tier techs, analysts continue to back PSYS and MPHL as their top picks while they find risk reward favourable in recently upgraded ZENT and FSOL amongst the small caps.
Target price, Upside
Infosys – Target price: Rs 1,800, Upside: 20%
HCL Tech – Target price: Rs 1,180, Upside: 14%
Mphasis – Target price: Rs 2,870, Upside: 13%
Persistent Systems – Target price: Rs 4,320, Upside: 19%
Zensar – Target price – Rs 400, Upside: 34%
Firstsource – Target price: Rs 165, Upside: 47%
“We revise our FY22-24 estimates to factor in adverse cross currency movements which result in moderation in our USD revenue growth assumptions.” In addition, the brokerage revised our USD/INR assumptions to INR 77 per US dollar from 74/$ earlier. The net result is a (2.4%)-2.9% change in their FY22-24E EPS across the coverage universe.
(The stock recommendations in this story are by the respective research analysts and brokerage firms. Financial Express.com does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)