Survival of the fittest! In crises, IT index trumps Nifty50. Here’s how to trade top sectoral stocks

But this is not the first instance when the sector has been under stress. In as many as four previous crises, it took a hit. However, the silver lining is that its underperformance was lower than the broader Nifty50.

According to a research report by Nuvama, the Indian IT sector showed more resilience than the combined 50-stock index in at least four global upheavals viz. European Debt Crisis, Taper Tantrum, China Devaluation and IL&FS crises.

European Debt Crisis: The European debt crisis is often referred to as the Eurozone crisis. During 2009 and late 2010, several European countries wrestled with problems of their sovereign debt repayments which they had amassed over decades. Nifty’s returns during this period was (-)28% versus (-)12% returned by NSE IT.

Taper Tantrum: Taper tantrum was a collective reactionary panic in 2013 which triggered a spike in US Treasury yields. It was triggered by the Federal Reserve’s action involving slowly putting the brakes on its quantitative easing (QE) programme. It was feared that the market would crumble, as the result of the stopping of QE. During this period, the NSE IT companies returns were 29% versus negative 15% returns of Nifty50, the Nuvama report said.

China yuan Devaluation: In what is assumed as a desperate attempt by China to boost its dwindling exports growth, the People’s Bank of China (PBOC) surprised markets with three consecutive devaluations of the Chinese yuan renminbi (CNY) in August 2015. Nuvama said that Nifty fell 23% this time while NSE IT returns declined by 11%.

IL&FS Crisis: The most recent was the setback to the Indian financial system which saw the collapse of IL&FS in 2018. The crisis sapped liquidity from the financial system creating severe funding issues for the NBFCs. Even in this crisis the IT sector trumped the broader market Nifty50. While the former gave negative returns of 11%, the latter’s returns plummeted by 15%, this report said.

ET CONTRIBUTORS

Drawing a parallel to the above crises, the report claims that uncertainty looms large in the near-term, given the current situation.

Sector Outlook
Nuvama said that it expects the Indian IT services sector to deliver handsome returns over the next two-three years, though the rally this time will likely be more meritocratic in nature than the rising-tide-lifts-all-boats nature of the CY20–21 rally.

The demand environment would be driven by enterprises’ need for cloudification and digitisation — a journey embarked upon during Covid, but had to pause in the wake of a weak macroeconomic environment, the report said.

Nuvama’s Top Bets
The domestic brokerage has identified 10 stocks that it said will likely ride the tide of uncertainty. On six stocks, it has a ‘Buy’ recommendation while a ‘Hold’ on the remaining four. Its top pick is LTIMindtree.

Nuvama has a ‘Buy’ stance on Coforge, TCS, Infosys and Persistent. It has upgraded HCL Technologies to ‘Buy’.

ET CONTRIBUTORS

Valuations
The IT services sector has corrected by 24% since January 2022), and has significantly underperformed the broader index (+6%) during this period. The valuations are now close to pre-covid levels indicating formation of a bottom.

ET CONTRIBUTORS

What do other brokerages say?

Nomura: Underweight on IT
“Slowdown in global tech demand, valuations elevated vs pre-pandemic levels. Nifty IT index under performed in 2022 (-25% vs +7% for Nifty) and is largely in-line with Nifty YTD. With slowdown in revenue growth momentum, we expect valuations to compress”.

Buy: Tech Mahindra / Coforge
Least Preferred: TCS / L&T Technology Services

Kotak Institutional Equities: IT companies not immune to demand slowdown, says Kotak. US-based IT services company EPAM’s CY2023E revenue growth outlook downgrade is a precursor to what lies ahead. Also read

Buy & Sell Strategy
– HCL Technologies: Buy | Rs 1,138
– Infosys: Buy | Rs 1,305
– Tech Mahindra: Buy | Rs 1,109
– RateGain: Buy | Rs 396 BUY
– TCS: Add | Rs 3,289
– LTIMindtree: Reduce | Rs 4,943
– Mphasis: Reduce | Rs 1,987
– Wipro: Reduce | Rs 404
– L&T Technology Services: Sell | Rs 3,932

IIFL
Multiple headwinds ahead in the event of FII outflow. Imminent threat to business models of IT companies from GPT/AI.

Buy: Persistent

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