Do you want to invest in IT stocks? That could be a counter bet at this point | Jobs Vox

Indian IT stocks have seen a sharp decline this year, dragged down by recession concerns in the US and Europe, which are major markets for IT companies.

After the US Federal Reserve announced that the fight against inflation is not over yet and that interest rate hikes will continue in the coming year, concerns about the recession have become stronger.

If the US sees a recession, there will be a significant impact on the demand scenario of IT companies, which will reduce their profitability.

Analysts and brokerage houses point out that the demand for digital and cloud services has started to cool down.

A few days ago, global IT firm Accenture reported lower bookings for the quarter, highlighting the impact of worsening macros.

The Nifty IT index is down 26 percent this year as of December 20, with all stocks in the red. Stocks such as Wipro, Mphasis, Tech Mahindra and LTIMindtree fell more than 40 percent each. The equity benchmark Nifti50 rose 6 percent in the period.


Performance of IT stocks, NIfti50 and Nifti IT index in 2022.

It could be a counter bet

The short-term outlook for IT forms looks bleak, but they may be decent bets in the long run as their valuations have come down significantly.

Most of the downside for the IT sector is already on the table, which is expected to limit further declines in IT stocks.

Besides, the US recession will be a temporary phenomenon and not a structural issue, so the pain for the IT sector may not last long.

Analysts advise accumulating IT stocks on the downside for the long-term time frame.

Seshadri Sen, Head of Research, Alchemy Capital Management believes IT firm earnings may be mixed in FY24 – revenue growth is likely to slow, but margins could recover as wage cost pressures ease.

However, Sen pointed out that the revenue slowdown is temporary because the long-term runway is technology and digital spending by global corporations remains strong.

Sen sees the IT sector as a long-term contrarian bet despite short-term headwinds.

“In our view, the correction makes IT a contrarian opportunity, given the high-quality and ultra-profitable companies in the sector.” Valuations, however, still hover around long-term averages, so there may not be instant gratification. trade, but it will probably be better from a one-year perspective,” Sen said.

G Chokkalingam, founder and head of research at Equinomics Research & Advisors also sees IT as a contrarian bet as it expects the rate hike cycle to end by the middle of next year, boosting the outlook for IT stocks.

“Yes, the IT sector could be a counter bet with an investment horizon in the next one year.” By mid-2023, the rate hike cycle must end and the same would help US IT stocks gain significantly. A peak in interest rates would end the dollar rally which would improve the profitability of US IT stocks,” Chokalingam explained.

“Since the valuations of US tech stocks and domestic IT stocks are positively correlated, after mid-2023, Indian IT stocks are likely to do very well.” Also, general market sentiment here is likely to be affected from the second half of 2023 due to the next general elections in India and a possible rise in crude oil prices. Global oil demand is likely to increase significantly from mid-2023 as global economic growth is expected to improve. These two possible scenarios are likely to force investors to turn to IT stocks. Hence, IT stocks could be a good counter bet now with an investment horizon of one year,” Chokkalingam said.

A sharp decline in the rupee will also help the sector negotiate better and pass on some increase in employee costs in the medium term.

“A better option might be to focus on lower-quality small and mid-cap IT stocks, as the sector’s dollar growth is in the low single digits.” “Further consolidation in this sector through acquisition is very possible,” Chokalingam said.

Disclaimer: The views and recommendations given in this article are the views of individual analysts and brokerage firms. This does not represent the views of MintGenie.


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First published: December 21, 2022, 3:20 p.m IST

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