The informational technology (IT) sector is reeling under the shadow of the global economic slowdown — with macroeconomic challenges, cautious client spending and a banking crisis in the US and Europe making it a grim picture. The IT sector growth has slipped on account of first-order and second-order implications of the prevalent macros, analysts said.
The macro challenges are manifesting in a set of outcomes for the sector ranging from cuts in discretionary spending, delay in decision-making, and slower deal ramp-up, to change in the propensity for price increases or volume discounts, according to analysts at HDFC Securities.
While the resilience or opportunity in the sector is the medium-term recoil, the brokerage said that it will focus on the 'near-term demand' markers and assess the growth dispersion despite the aggregate slowdown.
On the assumption that enterprise client trends are a strong indicator, HDFC Securities has built a framework to determine the relative strengths and risks for the companies.
Key inferences, as per the brokerage, are:
Mid-tier IT can sustain its growth premium over tier-1 IT — Tech Mahindra, Infosys and Mphasis have a higher risk of large clients moderating their tech spend and TCS or HCL Tech may outperform Infosys or Tech Mahindra.
Analysts believe that the risk to guidance mid-point of Infosys and HCL Tech is low, based on relative premium to global peers and the enterprise scorecard. "Our base case is a flat sequential growth trajectory for the sector in Q1FY24E and progressing onto long-term averages over Q2 to Q4FY24E; downside risk is more near-term rather than medium-term," the note stated.
The brokerage continues its preference for LTIMindtree within large-cap IT, Persistent Systems within midcap IT, and Zensar moves up in the pecking order.
Below are the IT stocks to buy, sell, add as recommended by HDFC Securities:
Most of the IT heavyweights have posted disappointing earnings in the March quarter (Q4FY23) and flagged a worsening outlook, at least in the near term.
The share of the IT sector in the overall corporate profits pool plunged to at least a 21-quarter low (five years) of 9.7 percent in the March quarter, according to a report. The share has declined nearly 3 percentage points in the past year and is sharply down from 34 percent share in profits in the March 2020 quarter.
Growth dispersion in BFSI, retail & CPG outperform
Key inferences from BFSI vertical enterprise analysis include growth dispersion between companies (TCS scoring above Infosys); increase in competitive intensity with Cognizant gaining share of large deals; BFSI leadership changes in tier-1 IT, and vendor consolidation deals; LTIMindtree and HCL Tech scoring higher with Wipro and Infosys showing relative weakness.
Weakness in sub-segments such as mortgage and investment banking has delayed decision-making, while there is relative strength in the insurance segment (large deal activity).
Enterprise outlook in the retail and CPG vertical has been positive with most enterprise clients outperforming. Key positive call-outs in the retail and CPG vertical are LTIMindtree, LTTS and TCS.
Mixed outlook across verticals
Healthcare vertical trends are positive and key positive call-outs are HCL Tech and Persistent in the vertical. The energy and utilities vertical may exhibit incremental weakness with greater thrust on cost optimisation due to enterprise growth deceleration and on centralisation of functions in large spending pools.
The telecom and media vertical also appears weak incrementally on large cost savings programmes by enterprises as well as capex trending lower ahead; negative call-outs in the vertical are Tech Mahindra and Infosys.
Strong business activity across sub-segments is supporting the travel and hospitality vertical and positive call-outs are LTIMindtree and Sonata Software.
Meanwhile, the Nifty IT index closed on a positive note on Tuesday, May 30. Shares of HCL Tech (up 0.86 percent), Infosys (up 0.72 percent), Wipro (up 0.68 percent), Persistent Systems (up 0.66 percent) and MPhasis (up 0.36 percent) ended the day as top gainers in the pack.
On the other hand, Tech Mahindra (down 1.4 percent), Coforge (down 0.45 percent) and Tata Consultancy (down 0.12 percent) finished as the top losers of the day.
The Nifty IT index gained 2.40 percent so far this year, while Nifty auto index and Nifty Realty are up 11.92 percent and 8.97 percent, recently.
