After a rally in CY18, experts see time-wise correction in IT stocks

Most information technology (IT) companies that have announced their earnings for the June 2018 quarter and have met analysts’ expectations. The combined revenue of the companies that have declared results for the recently concluded quarter stands at Rs 934.87 billion, a rise of 12.2% on a y-o-y basis. The combined net profit at Rs 162 billion has also moved up 11.6%% during this period on a y-o-y basis.

The performance was aided by an overall sentiment improvement in the BFSI (banking, financial services and insurance) vertical in most cases and the rupee’s depreciation against the US dollar.

On their part, markets took cognizance of these developments. Stocks of most IT companies have gained ground thus far in calendar year 2018 (CY18). The Nifty IT index outperformed the markets and has moved up around 25 per cent in CY18, as compared to around 8 per cent rise in the Nifty50 index.

At the company level, a revival in both the core client segment and key operational geographies, along with some help from currency gains, helped Tata Consultancy Services (TCS) report a 6.8 per cent sequential rise, and a 23 per cent year-on-year jump, in June quarter net profit to Rs 73.40 billion.

The stock surged 5 per cent a day after the results were announced on July 11 and has gained 44 per cent on a year-to-date (YTD) basis, ACE Equity data show.

Meanwhile, Infosys' numbers disappointed on the net profit front though its revenue and guidance met estimates. It reported a 2.1 per cent sequential decline, and a 3.7 per cent on-year growth in consolidated net profit at Rs 36.12 billion for the same time period. The company, however, maintained its full-year revenue guidance of 6 per cent to 8 per cent growth in constant currency terms.

Going ahead, even though analysts remain bullish on IT stocks, they caution against the sharp rally seen thus far in CY18 and the valuations at which some of these stocks trade. A time-wise correction is possible in these stocks, experts suggest.

A K Prabhakar, head of research at IDBI Capital says investors who wish to buy only for the short-term should wait for 5- 7 per cent correction before putting fresh money in these stocks.

“TCS is our top pick in the IT sector followed by HCL Technologies and Infosys. Wipro, on the other hand, can’t deliver good returns going ahead based on its recent earnings performance. HCL Technologies can rally up to 15 per cent in a year,” Prabhakar says.

For Harit Shah, research analyst at Reliance Securities, TCS remains the top pick on the back of improved visibility in the BFSI and Retail verticals. “With Digital contributing substantially (25 per cent of its revenues) and healthy growth in this segment will move the needle meaningfully going forward. High pay-outs to shareholders in the form of share buybacks, along with improving business visibility will ensure the stock remains at elevated valuations,” he adds.

Among the mid-cap IT stocks, Shah prefers Cyient and Sonata Software, given focus on niche verticals & services. “Relationships with marquee clients (UTC for Cyient and Microsoft for Sonata) and healthy growth prospects augur well for both the IT companies,” he adds.

Tata Elxsi, Cyient, and Persistent Systems are Prabhakar’s top picks in the mid-cap IT space.
 

COMPANIES	Stock Price (Rs)	YTD Change (%)
KPIT Technologies	296.75	64.5
Mindtree	935	53.25
Tata Elxsi	1428.15	46.23
TCS	1941.25	43.77
Tech Mahindra	680.3	35.02
Infosys	1365	31.34
Infibeam	179.25	26.81
HCL Tech	964.8	8.33
Oracle Financial	3880	-4.96
Wipro	276.85	-11.66
Source: AceEquity