Time-wise correction due in large-cap IT stocks; TCS, NIIT Tech top picks

A number of information technology (IT) companies have announced their earnings for the March 2018 quarter, which were mostly mostly in line with the analysts’ expectations. In some cases, the companies tweaked the guidance for financial year 2018-19 (FY19) to reflect the challenging business environment.

Infosys, for instance, revised the EBIT margin guidance for FY19 to 22-24 per cent from 23-25 per cent (FY18) earlier. However, the net profit and revenues grew 2.4 per cent and 5.6 per cent, respectively year-on-year during the recently conclude quarter. Sequentially, the net profit declined 28.1 per cent and revenues grew 1.6 per cent.

On the other hand, markets gave a thumbs-up to TCS after it posted double-digit revenue growth in dollar terms in Q4 for the first time in the last 12 quarters. The IT major reported a sequential growth of 8.2 per cent in Q4FY18 revenues. The firm’s consolidated profit was at Rs 69.04 billion for the quarter ended March 2018, registering a 5.7 per cent growth compared to Rs 65.31 billion in previous quarter and 4.5 per cent growth over year-ago period.

In constant currency terms, revenue of both Infosys and TCS grew 5.8 per cent and 6.7 per cent, respectively, in FY18.

So, should you invest in the large-cap IT stocks at the current levels?

Though analysts remain bullish on the sector, 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 the near-term in TCS (based on valuations), as well as in Infosys, Wipro and HCL Tech (subdued near-term operational outlook), experts suggest.

Harit Shah, research analyst at Reliance Securities, for instance, advises investors wait for 5- 10% correction before putting fresh money in these stocks.

"TCS is likely to perform the best (operationally) in FY19 followed by HCL Technologies. We expect 11.7 per cent dollar revenue growth on the back of strong growth in emerging verticals, client investments in Digital and recovery in BFSI and retail verticals. Expect 10.9 per cent dollar revenue growth for HCL Tech in FY19, albeit aided majorly by acquisitions. Infosys and Wipro are expected to both record single digit revenue growth of 8.1 per cent and 6.5 per cent, respectively,” Shah says.

For Gaurang Shah, head investment strategist at Geojit Financial Services, TCS remains the top pick in the IT sector followed by Infosys and HCL Tech. Wipro, on the other hand, he thinks, can’t deliver good returns going ahead based on its recent earnings performance. He expects a 15-20% return from blue-chip IT stocks in the coming three - four years.

IT stocks outperformed the benchmark indices in April, rallying 8.8 per cent, as compared to a 3.4 per cent rise in the Nifty.

Gains were led by Tata Consultancy Services (TCS). The stock rallied nearly 20 per cent in April 2018 and became the first Indian IT company to scale $100 billion market capitalisation (market-cap) mark.

Infosys, India's second-largest software services firm soared 5.72 per cent and HCL Technologies (2 per cent) at the bourses, ACE Equity data show.

Among the mid-cap IT stocks, Shah of Geojit expects NIIT Tech to outdo large-cap peers in FY19 in terms of operational and stock market performance. "NIIT Tech can deliver 20-25% return for investors in the next three - four years," he says.