Nifty IT falls post TCS, Infosys results; sector to underperform

Information technology (IT) sector was in focus on Friday, with the NiftyIT index falling over 1% after two of its biggest constituents, Infosys and TCS, announced their Q1FY18 results. 

So far in 2017, the index has underperformed the market by gaining 2% against 18% rise in the benchmark index amid concerns of rupee appreciation, wage hikes and visa related issues. 
 

The Nifty IT index extended losses, ending over 1% lower for teh day as compared to 0.05% fall in BSE Sensex.

While Infosys beat street expectations to gain as much as 3%, TCS was the top loser on the frontline indices on a below-estimate Q1 performance.

Shares of the second largest IT major, Infosys touched Rs 1,000-mark for the first time since May 30, 2017 after the company reported a 1.4% growth in profit to Rs 3,483 crore and revenue rise of 1.8% to Rs 17,078 crore, on the back of improved operation controls. The stock has rallied over 5% in July so far.

TCS, on the other hand, fell as much as 2.2% after it saw its first quarter profit drop 5.8% to Rs 5,950 crore due to currency fluctuations and wage hikes as the banking and financial services and retail businesses slowed. The scrip gained around 2% in July so far after a over 7% fall in June.

Going ahead, anlaysts expect the stocks to under-perform. ICICI Securities, for instance, has downgraded TCS to hold post the Q1FY18 numbers.

"Our earnings estimates for FY18/FY19 were already lower than consensus by 3-4% but we trim our estimates modestly further by 1.9% and 1.5% for FY18 and FY19, respectively. Target price moves from Rs 2,411 to Rs 2,375. Downgrade to HOLD," the brokerage said in a post result note.

Among other IT sector firms, Tata Elxsi fell 1.75%, HCL Tech tumbled 1%, MindTree declined 0.5% and Wipro shed 0.4% in  today’s trade. Only 2 stocks were trading in positive on the Nifty IT index.

“IT sector, as a whole will continue to underperform the benchmark indices as there has been a massive structural change for the large companied. In rupee terms, they have been bringing single digit revenue; even the profit is either in single digit or in negative, which is very rate in the history of IT sector. So, in the short-to-medium term, the sector will underperform,” said G Chokkalingam, Founder & Managing Director of Equinomics Research & Advisory.

Adding: “The wealth creation story in the large IT stocks has been over for a while now. Since, they are not able to grow organically; there will be a lot of opportunities for M&A activities in the IT space. Hence, the inorganic growth will get further momentum. Therefore, will recommend quality mid-sized IT companies.

At current valuations, Chokkalingam prefers Infosys, followed by HCL tech among the top four IT companies (Infosys, TCS, Wipro and HCL Tech).