Buyback hopes bring IT stocks to life; H1B visa, soft earnings loom large

The expert sees the IT sector to grow by 9-10% in FY18, which is in line with Nasscom's projections

Riding on buyback buzz around major IT firms, the Nifty IT index may have rallied most among NSE sectoral indices in February, experts believe further upside is limited as concerns over H1B visa and single digit revenue growth loom large in the forthcoming quarters.

The IT barometer on Monday closed as the only sectoral loser after the US government imposed a temporary suspension on premium processing of H1-B visas. 

Interestingly, the index has rallied over 9% to 10,779 since January 31, when Donald Trump administration introduced a bill in the US House of Representatives requiring companies to double H1B visa holders’ minimum pay to $130,000 a year. By comparison, Nifty50 added 5% during the same period.

Experts said the gains the index saw were made largely on mega buyback announcement by TCS and, not too much should be read into the recent rally given the uncertainty around US geography and soft revenue growth expected in the fourth quarter. 

Kishor Ostwal, CMD, CNI Research although sees moderate growth of 6-7% in the fourth quarter, he expects the domestic demand to offset the negative impact of ongoing issues in US. 

“Even though there is a setback from US on H1B visa, domestic consumption will support revenue growth in IT firms because push to digitisation will require technology support,” HE SAID 

The expert sees the IT sector to grow by 9-10% in FY18, which is in line with the IT industry lobby Nasscom’s projections.   

Among individual largecap IT stocks, Infosys and TCS advanced 11% each Since January 31, while Tech Mahindra, Wipro and HCL Technologies gained 10%, 8% and 6%, respectively. 

“IT stocks had been a laggard for 6-9 months or so, but regained some lost ground last month thanks to buyback announcement by TCS, which triggered a positive momentum in the stocks as investors believe more IT companies will go for buybacks. One should see this rally in the context of overall market which has also done well,” said Jagannadham Thunuguntla, Head of Research at Karvy Stock Broking.

“US immigration policy and earnings visibility on the business growth front are key things to watch, going forward,” he added.

G Chokkalingam, founder of Equinomics Research and Advisory does not see much upside in largecap IT stocks but advised to invest in Infosys and TCS for the long-term. 

“Wealth creation in largecap IT stocks is over. Even in rupee terms, revenue is growing in poor single digit. However, one can invest in stocks like Infosys and TCS as they have been battered a lot and in the process valuation multiples have fallen very badly,” he said.

At the current levels, the Nifty IT index is trading at 17 times its trailing 12-month earnings per share (EPS), compared with Nifty's 23 times PE multiples.

Meanwhile, shares of Infosys and Wipro listed in US dipped on Monday after the Trump administration announced it would temporarily suspend expedited applications for H1B visas widely used by foreign tech workers.

Sarabjit Kour Nangra, VP Research- IT at Angel Broking pointed out the move will not impact the long term business fundamentals of the IT companies, but could see some impact on the business over the next one-two quarters, if the ban lasts more than six-month. 

“Since the development is of short duration, we are not changing our recommendations and Infosys and HCL Tech remain our top picks,” she noted. 

*Figures in Rupees