IT stocks only sectoral loser in Q2. Time to bottom-fish? – Blue Barrows

NEW DELHI: By recording a loss of over 5% so far in the September quarter, Nifty IT index has turned out to be the worst performing sector as investors dumped software stocks amid fears that recession will hit both margins and demand.

Within the Nifty IT pack,

was the top loser with a loss of around 12% while majors like (-8.5%), (-8.1%), (-6.8%) and (-5.8%) also eroded wealth.

LTTS and LTI were the top two gainers in the pack as they rallied 11.2% and 7.2%, respectively.

The correction comes after two years of massive outperformance by IT stocks as Covid acted as a major tailwind.

Analysts said valuations have now turned favourable for long-term investors as the underlying strong positioning of Indian IT incumbents is undisputed in the global IT landscape, with strong execution capabilities and extensive range of offerings.

“If we look at the heavyweights in the sector, valuations for the pack (barring the largest two players) have moved back closer to their pre-Covid levels,” said Nitasha Shankar, Research Head, YES Securities.

While it may be true that the slowdown combined with margin pressures will be factors the Street will be focusing on for the next few quarters, the downside is fairly protected for select names as they are not very far from the low end of the valuation bands when gauged on a cash flow yield or dividend yield basis, the analyst said adding that larger names could be more vulnerable as they still trade fairly above their pre-Covid valuations.

Accenture recently posted an in-line set of Q4 earnings, with strong outsourcing and deal bookings, though lowering its guidance was a bit lacklustre.

“Though valuation has turned reasonable for IT stocks after a steep fall, we believe a challenging macro environment and moderation in earning outlook could restrict any major outperformance in near term. Nevertheless, we continue to remain positive on the long term outlook for Indian IT incumbents, investors could use the current weakness to invest in a staggered manner for an investment horizon of 2-3 years,” said Sanjeev Hota, Vice President, Head of Research at Sharekhan.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)