IT stocks: Q4 worst since Covid days but dividend, buybacks can keep doomsday away

As the demand for IT services looks in the grip of a slowdown with no hopes of recovery in the first two quarters of FY24, tier-I tech stocks have lost up to 21% in the last 3 months with Infosys being the top loser in the pack.

The decline in stock prices has also made dividend yields inch higher. Calculations done by global brokerage firm Jefferies shows that on an average the projected yield comes to 3.9%. In terms of FY24 estimated earnings, Tech Mahindra has the highest yield at 5.8%, followed by HCL Tech’s 5.4%.

While Wipro has the lowest dividend yield among the top 5, the IT major’s stock may get support from Rs 12,000 crore buyback announced last month. The buyback offer price of Rs 445 is at a 16% premium to Tuesday’s closing price.

Should you buy, sell or hold?

While the near term outlook in the next two quarters looks unanimously weak, Jefferies analysts believe that the consensus USD revenue growth expectations of 7% in FY24 needs a sharp growth recovery in the second half of FY24 which seems optimistic.

“A weak Q4 and heightened caution led to a 1-6% cut in FY24/25 consensus EPS estimates. The back-ended growth implies further risks to consensus estimates, which could drive further derating. Our FY24/25 EPS estimates are 1-11% below consensus and with the sector still trading at 8% premium to its 10-yr average and 13% premium to Nifty, we remain selective with Infosys being our only pick,” Jefferies analysts Akshat Agarwal and Ankur Pant said.

For JM Financial, Wipro remains its anti-consensus buy and sees higher risk in LTIMindtree and Persistent Systems. Coforge is its preferred midcap pick.

The domestic brokerage has lowered its FY24 EPS for top 5 by 0.0-5% post Q4 results.

“Conversely, our FY24/25E EPS for Wipro is 3.5%/6.5% above consensus even though PAT is only 0-3% higher, as we suspect the Street has not factored a lowered equity base due to buy-back (~5% reduction). We therefore see potential of earning surprises in WPRO which remains our only large-cap buy,” JM Financial’s Abhishek Kumar said.

Latest data from NSDL shows that FIIs sold IT stocks worth Rs 6,910 crore in March and then followed it up with another sell orders totalling Rs 4,908 crore.

Analysts say that despite heavy outflows, FII positioning remains slightly overweight on the sector and has potential to reduce further.

“High growth expectations coupled with expensive valuations at 21x vs average 19.8x make us underweight on the sector,” said BofA Securities’ head of India research Amish Shah.

Within the IT pack, BofA has neutral ratings on TCS and Infosys and expects Wipro and Tech Mahindra to underperform.

(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 the Economic Times)