IT stocks: Down up to 50% from peak, are Street’s poster boys cheap enough?

Infosys stock, which is down over 35% from its all-time high level, is available at 21.71x PE vs its 5-year average PE of 25.59x. Similarly, IT bellwether TCS is down over 22% from peak and is not finding enough takers at 27x PE, below the 5-year average of 29x.

Mphasis and Wipro are the two other IT stocks that are trading below their average PE levels. Both of them have lost more than half of their market value from peak.

Among all Nifty IT stocks, Persistent System has been the most resistant to the downfall as it is down only 15% and is trading well above its average valuation.

Tech Mahindra, which has eroded 44% of investor wealth from its peak touched on 30 December 2021, is still trading above its average PE of 17x.

Are IT stocks cheap or optically cheap?
India’s two largest software services exporters – TCS and Infosys – have been among the biggest wealth creators on the Street. According to Motilal Oswal Wealth Creation Study 2022 report, TCS created Rs 9.55 lakh crore wealth and Infosys Rs 5.8 lakh crore in the last decade.However, lower-than-expected results by both the IT majors in the March quarter show that cracks are beginning to emerge with the worst being ahead of us. “Worsening sentiment in the US, weakness in communications and BFSI vertical and higher scrutiny on discretionary IT spends are the key themes emerging from recent results of ACN/TCS/Infosys,” Jefferies analysts Akshat Agarwal and Ankur Pant said.

The global brokerage, which has a cautious stance on IT with preference for large IT firms, has warned that companies with greater exposure to North America (LTIMindtree and Mphasis) and communications vertical (Tech Mahindra) may see greater pressures on growth in the near term.

North America has been the region with the slowest growth over the past two quarters for TCS, Infosys and Accenture. Other than that, growth is also moderating in the BFSI segment, particularly in the US, amid the recent regional banking crisis.

“The banking crisis in US regional banks and European banks in March 2023 has induced greater caution and could impact the June 2023 quarter. We would not be surprised by a weak US performance across companies that are likely to report in the coming days,” Kotak Institutional Equities said.

The brokerage has asked clients to avoid stocks trading at premium multiples after assuming elevated growth and margin assumptions.

Domestic brokerage firm Prabhudas Lilladher has reduced weightage on the IT sector by 170 basis points saying it sees near-term headwinds due to a slowdown in the BFSI segment in USA and Europe reflected in lower hiring.

“However, there is no dent to long-term growth story in engineering design services, ERP, data analytics, digital, artificial intelligence and supply chain etc. We cut weight in Infy while we increase weight behind LTTS,” it said.

For Jefferies, Infosys is the only Indian IT stock on which it has a buy rating, saying the valuations look attractive after the fall.

(With data inputs from Ritesh Presswala)

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