Beaten down IT stocks back in favour in 2023; analysts suggest buying these tech shares now
Information technology stocks have been buzzing on Dalal Street due to their superlative performance in the ongoing calendar year. After falling more than 24 per cent last year, the BSE IT index has gained 8.6 per cent so far in the ongoing calendar year till February 16, 2023. Market watchers believe that this is the time to turn a little aggressive on the sector as stress in the sector seems coming down.
With a rally of around 42 per cent, Nucleus Software Exports have gained the most in 2023 to date. Shares of the company traded at Rs 544.50 on February 16, 2023 against Rs 384.15 on December 30, 2022. It was followed by Cigniti Technologies (up 35.50 per cent), RateGain Travel Technologies (up 31 per cent), Persistent Systems (up 28 per cent), Zensar Technologies (up 24.40 per cent), 63 Moons Technologies (up 23 per cent), Newgen Software Technologies (up 23 per cent), KPIT Technologies (up 23 per cent), Sonata Software (up 20 per cent), Firstsource Solutions (up 18 per cent) and D-Link (India) (up 16 per cent).
Elara Capital in a report said, “Buoyant deal activity in Q3FY23 surprised us and quarter-to-date deal announcements also signalled a similar narrative. We saw resilience in tech spending in this paradox of an uncertain macro environment and robust deal activity.”
Commenting on the IT sector, G Chokkalingam, Founder, Equinomics Research and Advisory said, “We are bullish on the IT sector. Earlier, the sector got hammered due to employee costs. At present, things are looking better for the sector as employee cost and attrition rate are coming down. It is an ideal time to go aggressive on the sector as valuations are still attractive.”
Other IT players including Datamatics Global Services, Mphasis, LTIMindtree, Cyient, Control Print, Tech Mahindra, Expleo Solutions, Tata Consultancy Services, Coforge and Allied Digital Services also gained somewhere between 8 per cent-15 per cent on a year-to-date basis. On the other hand, the benchmark BSE Sensex gained just 0.80 per cent during the same period.
The recently concluded result season also stood in favour of the IT sector as the combined top line and bottom line of the sector grew double-digit for the quarter ended December 31, 2022. IT major Tata Consultancy Services reported an 11 per cent YoY growth in net profit to Rs 10,846 crore for the quarter ended December 2022 against Rs 9,769 crore in the same quarter last year. The company’s revenue during Q3FY23 was Rs 58,229 crore, up 19.1 per cent from Rs 48,885 crore in the quarter ended December 2021. Other IT majors including Infosys and HCL Technologies also reported 13.3 per cent and 19 per cent YoY growth in net profit in Q3FY23.
Motilal Oswal Financial Services think that December stood in line for IT companies despite the challenging macro environment and easing supply headwinds. “After six consecutive quarters of underperformance versus tier-2, the tier-1 companies’ revenue growth has outpaced the tier-2 pack within our coverage universe,” the brokerage said. In the IT space, Motilal Oswal Financial Services has ‘Buy’ call on players like as Cyient, HCL Technologies, Infosys, TCS and Zensar Technologies.
On the other hand, Chokkalingam believes that there is a scope for organic growth in the sector as IT companies are sitting on huge cash. “There will be an opportunity in midcap IT stocks in terms of the acquisition. Investors should look for cash-rich players which are trading at a 14-15 price-to-earnings ratio. In addition to this, enterprise value to annual IT revenue should be around 1-1.5 times. This parameter helped us to identify quality midcap IT stocks in the past,” he said in an interaction with Business Today TV.
He further said that Q3 revenue is still not very optimistic. However, there was visibility in the bottom line. Going forward, there will be a good improvement in the net profit of the majority of IT companies in the next 2 quarters. “We are positive on IT companies like Oracle Finance and Cyient at present,” Chokkalingam said.
Tech Mahindra and TCS among Tier-I firms and Coforge and Persistent Systems from Tier-II are the top picks of Elara Capital in the IT space.
“We continue to believe risk-reward is favourable for India IT. Reasonable valuation limits downside based on P/E closer to the five-year average,” Elara Capital said adding Tech Mahindra, TCS, Coforge and Persistent Systems are among its preferred bets.
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