The weaker-than-expected TCS earnings added to existing concerns over a potential US recession that is feared to hurt deal pipeline for IT companies and impact growth in FY24. Some analysts said further sell-off could prompt investors to buy large-cap IT stocks.
AgenciesSome analysts do not expect a sharp fall in these stocks from current levels.
Mumbai: Shares of information technology companies were among the top laggards as weaker margins by bellwether Tata Consultancy Services (TCS) in the June quarter further soured investor sentiment for the sector. The weaker-than-expected TCS earnings added to existing concerns over a potential US recession that is feared to hurt deal pipeline for IT companies and impact growth in FY24. Some analysts said further sell-off could prompt investors to buy large-cap IT stocks.
"TCS margins were a disappointment and the outlook in terms of growth for the September quarter may not be great," said Hemang Jani, head of equity strategy, broking and distribution, Motilal Oswal Financial Services. "Management commentary is positive, but at the same time, it is talking about the possible impact of slowdown in the US."
Shares of software exporters are in bear territory with the BSE IT index declining 26% so far in 2022. From its all-time high, the index is down 27.6%.
Analysts are divided on outlook for the sector. Last week, brokerage Jefferies downgraded shares of select IT companies HCL Technologies, Tech Mahindra, Wipro, Larsen & Toubro Infotech, Mindtree and Coforge as it believes revenue growth of the sector is likely to moderate due to a likely recession in the US in FY24.
Jefferies said it expects earnings cuts to drive further PE de-rating for IT stocks. It is most bullish on Infosys.
A brief rebound in these stocks could be in the offing, said Rohit Srivastava, founder, Indiacharts.com.
"IT stocks have corrected so much that weaker numbers have been discounted to some extent," he said. "The sector is oversold and there is room for a short-term bounce though I won't say this is the time for a long-term buy."
Some analysts do not expect a sharp fall in these stocks from current levels.
"IT stocks are now starting to look attractive and this is not the time to sell IT stocks. With another 5-6% decline the sector stocks will become even more attractive,” said Siddarth Bhamre, research head at Religare Broking. He is bullish on HCL Technologies on the grounds that it is the most cheaply valued among large-cap IT stocks.
Jani of Motilal Oswal said midcap IT stocks are riskier bets compared to their large-cap peers.
“Midcap IT stocks carry a slightly higher risk of disappointment on growth, so we are more comfortable buying large-cap IT stocks than midcap IT stocks,” said Jani.
“The sector has corrected around 30% from recent highs, maybe another 5-7% is possible but we are not looking at a bigger fall and we will be looking at adding large-cap IT names on correction,” said Jani.
Agencies
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