IT stocks surge most since Sept 2020 on Nasdaq rebound

Battered shares of software services exporters were among the top gainers on Monday boosted by a rebound in technology-heavy Nasdaq on Friday on hopes that the US may not sink into a recession. The Nifty IT (Information Technology) index surged 4% on Monday, its highest single-day gain since September 14, 2020. TCS, Infosys, and HCL Technologies gained between 3% and 5% on Monday, while Mindtree, Coforge, and Persistent Systems surged more than 5%.

Analysts are recommending buying select IT stocks citing strong outlook for the sector due to the 'digitization wave'. Their top picks are Infosys, TCS, HCL Technologies, Coforge, Tata Elxsi, Mastek, BirlaSoft and Intellect Design Arena.

"Concerns have been around fears of a US recession which led to multiple sharp corrections in the IT stocks," said Varun Saboo, director- institutional equities, Prabhudas Lilladher. "I believe this fall is a great buying opportunity in stocks like Infosys, TCS and Coforge with a long-term view."

On average, IT stocks have fallen 30% from their yearly highs due to worries about a recession in the US, sell-off on the Nasdaq, steep valuations after the recent run-up and the impact of wage inflation on their operating profitability. Infosys and HCL Technologies declined nearly 22% from their 52-week-high, and Wipro and Tech Mahindra are down almost 35%. Analysts believe the top IT stocks are attractively valued post the corrections.

"After the correction, the IT index has witnessed a decent rebound in the last three sessions and is currently hovering around the resistance zone of short-term moving average (20 EMA)," said Ajit Mishra, VP-research, Religare Broking. "Indications favor further rebound but participants should maintain a selective approach."

Analysts believe that digital, especially cloud migration and related tech spending, is a multi-decadal opportunity for the IT sector.

"At current prices, 5.4% average free cash flow growth is implied for large-cap IT services companies compared to 10.3% CAGR during FY15-20 and 15.5% during FY20-24," said Pankaj Chhaochharia, analyst, Antique Stock Broking. "This growth assumption appears reasonable given a strong medium-term outlook as the sector is riding the 'digitization wave' and hence recommend accumulating at current levels."

Some analysts remain cautious considering rising interest rates, an anticipated slowdown in the global economy, and profit warnings by global corporates. Headwinds like wage hikes, higher travel and visa costs, and lower utilization may continue to squeeze margins.

"Within the IT space, we like Infosys based on its strong track record, recent healthy deal wins, and relatively lower margin contraction than peers," said Mitul Shah, head of research, Reliance Securities. "The company would benefit from digital transformation, cloud, and broader IT growth. It would gain shares, and we expect double-digit revenue growth in FY23."