IT majors’ stocks, including those of Infosys and HCL Technologies, fell 7% and 10%, respectively, year over year. The declines of Wipro, Tata Technologies, Birlasoft, Mphasis, and LTIMindtree ranged from 4% to 26%. Conversely, within the same time frame, Tata Consultancy Services (TCS) saw a 4% growth.
In the midst of persistent geopolitical unrest and economic slowdown, foreign portfolio investors (FPI) are expressing pessimism regarding the Indian technology sector.
According to NSDL, they sold shares from the IT sector for Rs 4,550 crore between January and April of 2024. Up until May 9, 2024, the BSE IT index fell more than 5% YTD, while the benchmark BSE Sensex increased by 0.23% during that time.
IT majors’ stocks, including those of Infosys and HCL Technologies, fell 7% and 10%, respectively, year over year. The declines of Wipro, Tata Technologies, Birlasoft, Mphasis, and LTIMindtree ranged from 4% to 26%. Conversely, within the same time frame, Tata Consultancy Services (TCS) saw a 4% growth.
FPIs’ assets under custody (AUC) in IT equities fell to Rs 5.64 lakh crore as of April 30, 2024, from Rs 6 lakh crore on December 31, 2023, as a result of the decline in information technology stocks.
For the current fiscal year, the outlook for the IT industry appears dire. The revenue growth estimate for FY25, according to brokerage Prabhudas Lilladher, has been depressing. Tier-1 brands are predicted to record below mid-single digit growth (average), while Tier-2 firms are capping their revenue growth at high-single digit.
In contrast to their outlook for FY24, the corporations have shifted to more conservative advice for FY25, factoring in expected delays in project completion and execution. We may see an upward revision to the companies’ guidance as the year goes on if the expenditure recovery coincides with the expected economic recovery in the near future, according to a report by Prabhudas Lilladher.
The study also stated that poor performance in IT services continued until the final quarter of FY24. For certain names, the margin improvement or earnings growth was disappointing, even though the sales growth was mostly in line or slightly below consensus.
The brokerage stated that the demand environment remained unchanged in Q4 with large global enterprises continuing to stay cost-focused and reprioritize areas of investments that are critical to their core operations and that can drive immediate return on investment (ROI). The median revenue growth for the IT sector (Tier-I + Tier-II) came in at 0.7% QoQ CC, with Tier-2 companies continuing to outpace Tier-1 names and reporting median CC growth of 2.1% QoQ.
Investors should maintain a selective approach towards Tier-1 companies that possess a diverse business mix and have demonstrated a strong ability to capture current enterprise spending, according to Prabhudas Lilladher’s advice. HCL Technologies is rated as a “Buy” by the firm, with a target price of Rs 1,550. However, with target prices of Rs 5,015 and Rs 4,360 on LTI Mindtree and TCS, respectively, it gets a “Accumulate” rating.
“The Indian IT services industry is poised to continue moderate revenue growth in the near term due to concerns over macroeconomic conditions and inflationary headwinds,” stated Vinod TP, Research Analyst at Geojit Financial Services. However, cost-optimization initiatives should boost operating earnings.
Since worries about macro headwinds are likely to cause volatility, it is best to concentrate on high-quality stocks in the near term, especially those that operate in specialist markets and have the potential to exhibit robust revenue growth. Using an accumulation strategy is advised for long-term investors. It could be wiser to concentrate on businesses with solid balance sheets, especially those engaged in AI and Gen AI technologies with successful deal wins and those de-risking by diversifying across multiple industries, the expert added.