IT sector still a good bet after lacklustre earnings? Here's what experts say | Mint – Mint

Even though the IT index has outperformed the benchmark in 2023 YTD, the underwhelming result of some IT majors and their lacklustre near-term prospects exerted pressure on the sector in the month of October. The Nifty IT index has been volatile in this current month, giving muted returns as against a 0.6 percent rise in benchmark Nifty.

However, for 2023 YTD, the IT index has advanced over 11 percent versus a 9 percent gain in Nifty.

Still, experts see recovery in this space in the next few quarters driven by sustained margins and strong order books. But does the recent outperformance warrant staying away from this space in the current environment?

IT sector trend

Like all major indices, the Nifty IT index also hit its 52-week high of 33,402.75 last month, however, it has not touched its record high levels till now this year.

After hitting its 52-week high, the index consolidated on the back of weak results by IT majors in the September quarter, narrowing revenue growth guidance and weak outlook.

Currently trading at 31,807.95, the index is still over 19 percent away from its all-time high of 39,447, hit in January 2022, whereas benchmark indices Nifty and Sensex and most of the sectoral indices have already hit new peaks in September.

The sector gave exceptional returns right after the COVID pandemic ended, however, after hitting its record high, it has been on a continuous downtrend on concerns regarding the US recession, weak margins, slow order book and poor growth prospects. This year, meanwhile, has seen some recovery on the back of improvement in the aforementioned concerns.

However, some recovery was seen in 2023 with the index giving positive returns in 5 straight months between May and September, rising almost 15 percent. Before that, it was in the red for 3 consecutive months between Feb and April. Meanwhile, in Jan, the IT index added 3.9 percent.

From its 52-week low of 26,184.45, the index has advanced 21.5 percent till date to currently trade at 31,807.95.

However, in the last 1 year, the index has underperformed benchmarks, up over 13 percent as against a 15 percent jump in Nifty.

Constituents

In 2023 YTD, all Nifty IT constituents, except Infosys (down 4.7 percent), have given positive returns. Persistent Systems has surged the most, 48.5 percent, followed by Coforge, 30 percent. Meanwhile, L&T Tech, HCL Tech, Mphasis, LTIMindTree, and Tech Mahindra have also given double-digit returns, rising between 16 and 28 percent. TCS and Wipro added 8.5 percent and 4.7 percent, respectively, in this period.

Should you still buy in this space? Here’s what experts suggest:

Vinit Bolinjkar, Head of Research, Ventura Securities

Developed economies are currently facing recessionary challenges, with sluggish GDP growth and the added strain of rising inflation affecting their real growth. “In light of these factors, we anticipate a grim future for the Indian IT industry due to diminished demand from the US and European markets. Given this scenario, we would recommend avoiding the IT sector as the recovery could take a longer time,” said Bolinjkar.

Nirvi Ashar – Fundamental Analyst, Religare Broking

In the near term, there are anticipated macro-challenges that are impacting clients’ spending and no specific timeline can be provided for recovery. “However, we expect the sector to recover in due course as the demand for newer technology seems to be robust and the order pipeline is improving. Meanwhile, companies are working towards improving utilisation and increasing productivity which will aid margin expansion. Amongst the IT, preference is towards large-cap IT names such as TCS & HCL Tech,” said Ashar.

Omkar Tanksale, Senior Research Analyst – IT, Axis Securities

“We do not see a quicker recovery as expected because of uncertainties and macroeconomic challenges. Rising inflation rates still put pressure on discretionary spending, resulting in delays in decision spending. We believe it will take a few more quarters to recover.

We are betting on midcaps rather than largecaps because of higher growth rates, growing ROE and strong deal pipelines.

Our top picks are :

a) Persistent Systems

b) Coforge”

Gaurav Bissa, VP, InCred Equities

Nifty IT sector has been in a 20-year uptrend. The index had witnessed a retest of 15-year rising trendline breakout level which was followed by 6-7 months of consolidation. The index recently witnessed a breakout from this consolidation and has been holding above it since then. The index is expected to witness fresh life high levels in the next two years with largecap stocks expected to move up strongly. The preferred stocks will be Infosys and Tech Mahindra from largecaps and Eclerx and Naukri from midcap space, said Bissa.