Rs 9,000 crore selloff! Should you follow FIIs in dumping IT stocks?

NEW DELHI: Amid a weakening macro environment and looming fears of recession, FIIs offloaded IT stocks worth over Rs 9,000 crore from their portfolios in September month alone.

Tech Mahindra, in which the FIIs hold over 30% stake, has been the top loser in Nifty IT index. While in the last one month, the stock has lost over 9%, wealth erosion on a year-to-date basis has been that of nearly 43%. Shares of Wipro are also down around 43% in 2022.Other top losers in the pack include Coforge, Mphasis, L&T's tech twins and MindTree. The selloff has been so deep that the best performing Nifty IT stock - TCS - is also down 18% YTD.

The stark underperformance comes amid consistent paring of stakes by FIIs in IT stocks which is their second largest bet in India after banking and financial services.

“There are concerns of decline in orders for the segment if the US tips into a recession soon. But these fears have not yet translated into reality,” said Dr VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Even as the recent selloff in IT stocks comes just ahead of the Q2 earnings season, analysts said this cannot be construed as indicative of a weak quarter ahead for the IT sector.

Accenture’s Q4 results and its guidance for FY23 have reassured investors that IT spends are not slowing down.

Analysts say the IT sector is expected to post reasonably strong Q2 topline performance with minimal adverse impact from the current volatile environment. However, margins may remain a mixed bag due to continued supply-side pressure with elevated attrition and individual impact from wage hikes.

“We forecast sequential revenue growth of 2.5-5% in c/c for large companies and 3.5-5.5% for

mid-tier companies. Growth will be led by strong spending on digital competencies by clients and the translation of TCV into revenues,” Kotak Institutional Equities said.

Edelweiss Securities expects most stocks under its coverage to deliver strong CC revenue growth in Q2 on the back of robust deal-wins in previous quarters, strong headcount addition and improvement in pricing mix.

Investors are also finding valuations attractive in the sector which is now trading at a PE of 21.6x, down 35% from the peak and 30% YoY.

“We continue to prefer tier-I players over their tier-II counterparts, given their relative valuation attractiveness and diversified client portfolio. Among tier-I players, we prefer TCS, HCL, and Infosys,” Motilal Oswal said while maintaining its positive stance on the sector due to a favorable medium to long term demand outlook despite near-term pain.

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