June quarter shareholding pattern shows that MFs raised stake in Infosys by 116 bps to 19.09%. The stock is up around 20% in the last one month.
Similarly, MF ownership in Tech Mahindra went up 127 bps to 15.27%, in HCL Tech by 54 bps to 8.53% and in TCS by 20 bps to 4.25%.
FIIs, on the other hand, didn’t look convinced that the IT sector is on the verge of bottoming out. During the quarter, foreign investors pared stake in 5 out of top 6 IT companies, barring Wipro.
Incidentally, Wipro is among the worst performing IT stocks in the last one month as it is up only about 2%. FII holding went down by 120 bps in HCL Tech, 137 bps in Infosys and 88 bps in case of Tech Mahindra.In Q1, largecap IT companies delivered better-than-expected results, showing improvements in margins whereas midcaps have missed the earnings estimate so far with expensive valuation compared to largecaps.”The Indian IT companies are focusing on improving operating profits by cost optimisation measures with a strong traction in deal wins. Overall, our stance remains positive for the sector in the future. Although current valuations are premium compared to the 5-year average fwd PE, recovery signs in BFSI and emergence of AI and gen AI are the future revenue visibility, supporting stay investing in the IT sector,” Vinod TP, Research Analyst, Geojit Financial Services, told ETMarkets.
He said the most challenging period is behind us, as inflationary pressure is forecast to moderate in the US. The sector’s outlook is bolstered by potential interest rate cuts in the US which will lead to improvement in spending.
“Fed interest rate cut expectation in Sep this year and the developments on the generative AI (Gen AI) are two positives for the IT companies. Commercialization of Gen AI is speeding up at enterprise level. The growth of the AI order book for companies such as IBM and Accenture is indicating higher demand for customization and integration required for Gen AI implementation,” said Ashwini Shami, smallcase Manager, EVP & Portfolio Manager at Omiscience Capital.
While describing Gen AI as the next large growth frontier for the IT services companies, he said the leading indicator for the ‘AI Gold’ rush is seen in terms of the steep demand for the AI chips – one of the picks & shovels of this gold rush.
“These enterprises will need significant support from the Indian IT service providers which is creating large growth opportunities for IT firms as indicated by various managements. Currently, the valuations are not factoring this growth opportunity fully and hence IT could be a good allocation for long term investors,” he said.
On the valuation front, IT sector has inched up to 24x FY26E EPS and is trading higher as compared to its long-term average of 18x.
Meeta Shetty, Fund Manager at Tata Asset Management, said most companies indicated green shoots in the spends on discretionary projects as well as some large verticals like BFSI.
“BFSI sector is the largest contributor to revenue for the large IT companies and has been seeing tepid growth for the last few quarters. The outlook for the BFSI vertical which the companies have provided indicates it has turned back to growth. If one corroborates this with the commentary of large global banks, it increases our confidence on this vertical’s growth outlook. Though the quarterly data from US banks on tech spending doesn’t show any meaningful change in trends yet,” she said.
While largecaps look more lucrative when it comes to midcap IT stocks, analysts recommend a stock-to-stock approach with companies focused in areas like ER&D, auto-EV and healthcare, etc.
(Data: 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)