IT Sector Outlook: Why is there little room for potential upside in short to medium term, how can trend affect price of stocks? Experts explain

IT sector has been struggling amid profit booking and lower than expected q4 earnings by IT giants such as Tata Consultancy Services (TCS) and Infosys Ltd

Expert attributes correction in IT stocks to supply side pressure and overstretched valuations. Source: Reuters

IT sector has been struggling amid profit booking and lower than expected q4 earnings by IT giants such as Tata Consultancy Services (TCS) and Infosys Ltd. However, Mind tree, which declared its results on Monday, came up with strong numbers and was in line with the expectations of the street. On April 19, Nifty IT and BSE Information Technology underperformed Nifty50 as the indices closed 7.5% and 7.4% in the last one week. The benchmark indices during the same time dropped 3.3% and 3.6% respectively.

Expert attributes correction in IT stocks to supply side pressure and overstretched valuations.

"Nifty IT is underperforming Nifty 50 due to supply-side pressures, the possibility of reduction in demand is due to macro headwinds in the western nations, and overstretched valuations," said Santosh Meena, Head of Research, Swastika Investmart Ltd on IT Sector.

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He is of the view that the IT sector has little scope for upside in the current market scenario.

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"Indian IT sector is trading at 28x 1-year forward P/E vs. past 10-year P/E of 18x, thus leaving a little room for potential upside in the short to medium term," said Meena

Speaking of TCS and Infosys results, he said results of both the IT companies had a common theme, attrition remains at an all-time high, competitive intensity is increasing and companies are losing their pricing power, wage hikes, a gradual return to the office, and an increase in discretionary spending will put pressure on EBIT margins, however, the deal pipeline remains robust.

About the consensus among IT companies that the clients are willing to spend for digitization regardless of their financial conditions and industry position, Swastika Investmart Head of Research opines that the phenomenon might change due to inflationary headwinds and weak global economic cues, which will affect the client’s ability to pay, thus reducing their discretionary spending towards digitization.

Another point to note is that the global interest rates are rising, therefore money is moving from growth stocks to value stocks, he underlines.

"We believe that the IT sector will underperform in the short to medium term, however, we can’t brush off the importance of digitization in the long term, the ability to scale using IT, and the rising importance of cloud migration.Thus we believe that despite short and medium-term hiccups, Indian IT companies will perform well in the long term," added the expert.

Krishna Kumar Karwa, MD, Emkay Global, also said Zee Business that next three to six months will be very crucial for IT sector. It has been the first time in the last two and half years that analysts have resorted to earnings cut after the results. If the number does not improve in the next six months, then analysts can also go for PE cuts. Broadly valuations are picture perfect and any weakness in the result or not in line with the analysts' expectations, it can severely affect stock price movement," said the expert.

Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.

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