IT stocks outrun markets for three consecutive quarters; midcaps shine

The Nifty IT index has outperformed the benchmark Nifty50 for the three consecutive quarters, rallying 26 per cent since June 30, 2017 as against9.4 per cent rise in the Nifty50 index. Even on a calendar year basis, IT stocks have done well at the bourses, with the gauge of IT stocks on the NSE rallying 9.4 per cent in CY18, as compared to 1.1 per cent fall in the Nifty50 index. 

Among individual stocks, Infinite Computer Solutions (up 79 per cent) and Mastek (54 per cent) from the mid-cap IT segment have zoomed over 50 per cent. NIIT Technologies, Mindtree, Mphasis, L&T Infotech, Tech Mahindra, Polaris Consultancy Services and Hexaware Technologies were up in the range of 20 per cent to 40 per cent thus far in CY18.

Large-cap IT companies like Tata Consultancy Services (TCS), Infosys and HCL Technologies outperformed the markets by gaining in the range of 8 per cent to 12 per cent in CY18. However, Wipro underperformed its peers, with the stock declining 9 per cent during the period.

The rally during the January – March 2018 quarter comes on the back of IT companies reporting strong margins in the December 2017 quarter and guiding for growth recovery in CY18. That apart, ebbing of concerns at the global level also saw smart money move into these counters, analysts say.

“The IT stocks underperformed around two years ago given the uncertainty surrounding Donald Trump’s presidency, artificial intelligence, management uncertainty in some companies and the H1- B visa issue. Since the stocks were beaten down badly due to these issues, the valuations started to get attractive as investors found value in these stocks. Over the last quarter, however, the overall nervousness in the markets made them a defensive play and smart money started chasing these stocks,” says Jagannadham Thunuguntla, senior vice-president and head of research (wealth) at Centrum Broking.

However, the rally now seems to be coming to a halt ahead of the fourth quarter results (Q4FY18) that kick-off on Friday with Infosys announcing its numbers post market hours. Thus far in April, the Nifty IT index has moved up 0.52 per cent as compared to nearly 3 per cent rise on the Nifty50.

Historically, IT stocks have underperformed the market during April – June (Q1) quarter of a financial year. In fact, in the last seven years, Nifty IT index had given negative returns in Q1 on six occasions between two per cent and eight per cent. However, the index had gained 7 per cent during June 2014 quarter, but still managed to underperform the Nifty 50, which rallied 13.5 per cent during this period.

“The upcoming results season will be an important indicator of sustained performance of IT sector, as the industry is at crossroads. Any price move has to be eventually justified by financial performance and settle the discussion whether the IT sector is in for a long-term bull phase,” Thunuguntla adds.

Analysts at Edelweiss Securities expects the top five IT players—TCS, Infosys, Wipro, HCL Technologies and Tech Mahindra – to clock 1.1 - 2.2 per cent USD revenue growth in Q4FY18 on a quarterly basis.

“While mid-caps are expected to outpace large peers during current quarter, we perceive positive bias to large caps in the medium-to-long run as digital gains scale on account of execution capabilities,” the brokerage firm said in results preview note.

Analysts at Nomura maintained a ‘buy’ rating on HCL Technologies and ‘reduce’ on Infosys, TCS and Wipro ahead of the results. They remain neutral on Tech Mahindra and Cognizant.