FIIs bullish on 2 midcap IT stocks but reduce bets on Infosys, TCS

NEW DELHI: As near-term cracks are beginning to emerge in the growth story of Indian software exporters amid slowdown in tech spends in the US-Europe markets and margin contraction, foreign institutional investors (FII) reduced their shareholding in Infosys and TCS in the March quarter.

Latest shareholding pattern shows that FIIs pared their stake in Infosys by 120 bps to 35.09% in March quarter and in the case of bellwether Tata Consultancy Services (TCS) their holding went down by 22 bps to 12.72%.

Similarly, FII ownership in Tech Mahindra also slipped down 108 bps to 26.87% in the last quarter. Out of the 10 Nifty IT stocks, FIIs reduced their holding in 3 other companies - LTTS, LTIMindtree and Mphasis.


On the other hand, dollars flowed in two midcap IT stocks - Coforge and Persistent Systems. Coforge saw FII holding inching 410 bps to cross the 25% mark while Persistent had a 26 bps rise.

IT major Wipro, which is under the lens ahead of its March quarter results and share buyback announcement on April 27, also saw 9 bps rise in FII holding to 6.39% in the March quarter. Foreign ownership also went up in case of HCL Technologies, whose shares are up around 1% in the last one year.

What should investors do?

Market insiders point out that IT companies with greater exposure to North America (LTIMindtree and Mphasis) and communications vertical (Tech Mahindra) may see greater pressures on growth in the near term.

Mphasis, whose shares are down around 40% in the last one year, is estimated to have around 80% of its revenues coming in from North America. LTIMindtree and Persistent also earn 72% and 78%, respectively, of their revenues from the region, data from Jefferies shows.

Tech Mahindra has the highest exposure to communications verticals at 40%, followed by Infosys at 12% and HCL Tech at 9%.

Analysts are also factoring in soft revenue growth in the BFSI vertical in FY24 after the SVB and Credit Suisse crises. When it comes to exposure to BFSI, Mphasis is again at the top with 62% exposure, followed by Coforge (54%) and TCS (38%).

"In the recent quarter results (Q4FY23), we saw that BFSI vertical growth for IT companies (Accenture, TCS, Infosys) has been much lower than the company average growth rates. We have already factored-in slowdown in the BFSI vertical for IT in CY23 due to macro-slowdown, wherein banks’ profitability may come under pressure due to weak credit growth in the economy," ICICI Securities analysts Sumeet Jain and Aditi Patil said.

The domestic brokerage prefers TCS, Infosys and LTIMindtree while for Jefferies Infosys is the only buy in the IT basket.

Kotak Institutional Equities analysts say one should avoid stocks that are trading at premium multiples after assuming elevated growth and margin assumptions.

Naushil Shah, Investment Advisor, TrustPlutus Wealth, says IT stocks could bottom out at multiples higher than earlier recessions. "Stock valuations today do not bake in recession but do build in a slowdown. Largecap stocks are about 10-15% away from building in a recessionary scenario," he said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)