IT sector seeing disruption, stocks underperforming: Should you go contra?

STOCK MARKET - Another quarter has gone by and technology majors have again failed to live up to the expectations – a couple of them have even lowered guidance for seasonally weak December and March quarters. A mere 4% rise in the Nifty IT index year-to-date also reflects the challenges and disruptions the domestic information technology (IT) firms have been facing for the past few quarters. While valuations on the counter have come off at reasonable levels and the recent dividend/buybacks are seen supporting the stock prices, analysts believe a stock-specific approach across the sector makes better sense than contra bets at present.

The Nifty IT index’s 4% increase so far this year looks pale before benchmark Nifty50’s 26% jump. Among individual stocks, Wipro has rallied 23%, TCS 10% and HCL Tech 1%, while Infosys has shed over 6% during the same period.

In the September quarter, only HCL Tech retained a higher-than-industry-average guidance for FY18, of 10.5-12.5% growth in constant currency (CC) terms. Infosys trimmed its FY18 CC revenue growth guidance to 5.5-6.5%, while Wipro reported a muted guidance of 0-2% QoQ revenue growth for the December quarter. TCS does not forecast future earnings.

Rakesh Tarway, head of research at Reliance Securities, noted growth would remain muted for the next two years, and advised looking at individual stocks with strong cash flows.

“The IT sector is currently undergoing a phase of disruption in the business model owing to trends like cloud computing, artificial intelligence, digitisation and automation. We believe these trends could continue to impact business growth for the next 1-2 years,” he said.