Indias IT stocks are being shunned by institutional investors despite the fact some are up to 25% below their 52-week peak levels. The Nifty IT Index is still trading at a 10% premium compared to its 10-year average valuations, with the likes of IT giants TCS, Infosys, HCL Tech, Wipro and Tech Mahindra still trading above pre-Covid valuation levels. Midcap IT stocks are trading at a 25% premium compared to large caps. Hemant Kapasi, head of equities at Sanctum Wealth, said the IT industry may experience a time correction over the next few quarters rather than a significant correction in valuations.
Nifty IT fell over 1% on Friday following Q3 results from Accenture, which had a negative effect on Indian IT peers. Although Accenture s revenue growth met expectations, investors were concerned about the lowering of its FY23 revenue growth guidance band, which could drag on margins and pose risks to LTIM, TechM, Infosys and HCLT. With the sector still trading at a premium amidst worsening demand, Jefferies analysts have maintained a cautious stance. Nomura is concerned about the demand outlook for Indian IT services. Meanwhile, Motilal Oswal prefers TCS followed by HCL Tech and Infosys.
A study of 13 CEO changes in the past decade shows midsized IT firms usually outperform larger ones on growth and profitability after a leadership change, with turnarounds in IT firms hard to achieve. Analysts say there is a stronger likelihood of mid-sized IT firms, including Mindtree, Birlasoft and Zensar, beating revenue and net profit growth expectations post-leadership change. The Nifty IT index has risen only 7% in the past year amid a slowdown and recession fears. Infosys is the only Indian IT stock with a buy rating from Jefferies, targeting Rs 1,570.
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