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Worst may not be over for Indian IT as software giants race against high expectations

Worst may not be over for Indian IT as software giants race against high expectations

By Sandeep Singh   IST (Updated)


Have major IT stocks — from the likes of TCS, Infosys and Wipro — made a bottom yet? The Nifty IT index has escaped the bear zone in teh past few days but experts warn that the worst may not be over.

Indian IT stocks may be showing signs of a rebound but the worst may not be over yet. The Nifty IT — which tracks the performance of India's top software exporters including TCS, Infosys and Wipro — still lurks deep into bear territory.
Experts say that wild expectations are continuing to put pressure on IT companies.
The IT index is more than 25 percent down from its all-time high, scaled in January. A stock is said to be in the bear zone when it retreats more than 20 percent from its recent peak.
The Nifty50 benchmark, on the other hand, has corrected 12 percent from its all-time high of October 2021.
The disappointment is reflected in the recent plunge in major IT stocks amid concerns that margin pressure will continue to counter improving management optimism.
StockCMP vs 200-day moving average (%)CMP vs 52-week high (%)PE (TTM)
HCL Tech-12.6-25.225.5
Tech Mahindra-22.8-38.822.4
That despite strong demand for technology thanks to the pandemic, as IT companies struggle against higher employee costs in their fight against sticky attrition.
What is ailing the Indian IT space?
"Employee attrition and the risk of a global recession are the main concerns for the IT sector," Chirag Kachhadiya, Lead IT Analyst-Institutional Research at Ashika Group, told CNBCTV18.com.
And even though IT may still be a promising story on Dalal Street for the long term, there might be more pain for investors at least for now.
"As growth expectations get corrected, especially on the earning side, there could be further downsides because even after the correction so far," Ankur Rudra, Head of India Telecom and IT Research at JPMorgan, said in an interview to CNBC-TV18.
The overall sector remains 40-45 percent above 10-15-year pre-COVID average levels, he said.
The stern warning comes days after market expert Ajay Bagga told CNBCTV18.com he remains cautious on IT and expects more pain ahead.
Even weakness in the rupee — which is not far from its lifetime low against the US dollar — has done little to rescue the software giants. Typically, rupee depreciation is positive for IT businesses, which earn the lion's share of their revenue from exports.
Several brokerages too have derated the IT pocket in the recent past citing overheated valuations. 
A ray of hope
Rahul Singh, CIO-Equities at Tata Mutual Fund, believes there are still some pockets that are attractive in the market, which usually doesn’t do well in an environment of high interest rates as well as inflation. He finds some largecap IT names attractive.
"The Nifty will form a base around 16x one year forward earnings... The market may either see a price or time correction... There is a small probability of tech spends getting hit due to US recession if the intensity of FII outflows reduces... We’ll still find fair value," he said. 
PhillipCapital expects IT valuations to find equilibrium between pre-pandemic and current levels soon. "Top-down fears have led to a sharp derating of valuations as consensus earnings have remained intact (minor downgrades for few companies)," the brokerage said in a research report dated June 7.
"While 2021 saw a massive rerating of the IT sector — the stocks have now fallen close to their average pre-COVID multiples. The improved fundamentals and demand environment post-COVID warrants a higher-than-pre-COVID multiple," it added.
It has TCS and Infosys among its top picks in the sector.
CompanyRatingTarget priceUpside (%)
HCL TechNeutral1,0603.6
Tech MahindraNeutral1,1804.4
Kachhadiya is of the view that employee attrition will ease or come under control in the next 2-3 quarters, which makes the sector a long-term structural story as a whole.
"We believe the IT space will continue to witness strong deal momentum and order flow for Cloud- and digital-led new tech solutions in line with market expectations," he said. 
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