IRCTC, Zomato, Infosys: Is investors' love for digital India over?

Investors, it seems, are shying away from stocks of companies in the 'digital' space/sector with most of the counters that comprise the Nifty India Digital index giving a negative return in the last one year. The index tracks the performance of a portfolio of stocks that broadly represent the 'digital theme' within basic industries like software, e-commerce, IT-enabled services, industrial electronics and telecom services companies.

The fall in some of these stocks in the last one year has been quite steep with the sharpest fall of around 60 per cent seen in the shares of PB Fintech Limited (parent company of Policybazaar). FSN E-Commerce Ventures (parent company of Nykaa), Tanla Platforms, MphasiS, IndiaMart InterMesh, Tech Mahindra, HCL Tech, Vodafone Idea, Infosys and IRCTC have been the other prominent losers that have skidded 12 per cent to 55 per cent during this period, data show.

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In comparison, the Nifty Digital index has slipped nearly 19 per cent in the last one year as compared to the Nifty50 that has moved up 1.3 per cent during this period.

A K Prabhakar, head of research at IDBI Capital, however, says that one cannot paint the entire sector with one brush. Investment in these stocks post the sharp fall seen over the year, he believes, has to be done on a case-by-case basis.

"There have been a number of companies that got listed in the digital space in the last two years. Many of these companies were not even making a profit and the valuation was steep. From Nykaa, PB Fintech, PayTM and Naukri to Zomato – a lot of these stocks have corrected heavily. At the global level, tech-heavy NASDAQ, too, has corrected significantly. However, one can selectively look at IT and telecom within this space. Investment in stocks of new-age companies can still be put off by a year," Prabhakar advised.

Those at Nomura, on the other hand, also remain cautious on the Indian IT sector as they expect a demand slowdown in the months ahead if a recession sets in globally.

"We remain cautious on the India IT services sector, overall. We believe investors are likely to be disappointed on revenue growth in fiscal 2023-24 (FY24). We prefer large-caps over mid-caps in the current environment. Our Buys are Infosys and Tech Mahindra (in large caps) in that order, and Persistent (in mid-caps). Our Reduce ideas are TCS (in large cap) and Larsen & Toubro Infotech (in midcaps)," wrote Abhishek Bhandari and Krish Beriwal of Nomura in a recent report.

That said, in the last 30 trading days, shares of companies such as Policybazaar, Nykaa, Tata Elxsi, Sonata Software, Vodafone Idea, Naukri, Cyient, Wipro and Paytm have slipped between 6 per cent and 18 per cent, NSE data show.

Structurally, G Chokkalingam, founder and chief investment officer at Equinomics Research said, IT companies like Infosys, TCS, Wipro and Cyient etc. have been growing in poor single digit in dollar terms over the last few years. It is just valuation contraction on account of meltdown in technology stocks on the NASDAQ and margin pressures that has led to the meltdown in their stock prices. These stocks, he said, would make a comeback once US markets stabilise and the domestic IT industry successfully addresses the issues of employee attrition, recession fears and recent huge salary payouts.

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"Some of the other 'digital / new-age' companies debuted at a steep valuation compared to the traditional technology firms. The rally fizzled out as they failed to make a decent profit. Moreover, their listing was an exit route to venture capitalists who took stakes earlier at throwaway prices. These companies will take over two – three years to make a profit, which could make their valuations attractive. Retail investors should exit these stocks whenever there is some revival in stock prices," Chokkalingam said.