Listed Indian IT Cos. at the cusp of a turnaround

After whopping returns of 60% in CY2020 & 58% in CY2021, NIFTY IT TRI corrected by ~22% in CY2022. Meanwhile, the broader NIFTY50 pack delivered a positive return of 4% in the same year. Aggressive rate hikes by the global central banks, high inflation, global growth slowdown & high valuations were key factors leading to a steep correction in the segment.

Amid all these, Q3FY23 results for TCS, Infosys, HCL Technologies & Wipro outperformed most expectations on the street. Many in the sector beat revenue & profit estimates, while a few highlighted incremental contract wins. Among the ones with published results, the larger four also reported a healthy decline in attrition which was brewing quite a concerning sentiment among segment investors. We expect many to benefit from the anticipated vendor consolidation amid changing global dynamics. Bolstering prospects further, the bulk deal pipeline seems to be improving in the wake of a clear increase in focus on automation and cost-efficient programmes.

While the sectoral gauge index’ P/E, is below the 2-year average, it remains slightly above the longer 5-year average. The metric has declined by ~34% over the past two years.

While a variety of opportunities lie ahead for the industry, a number of challenges are also expected to tag along. However, after weighing the probabilities and considering the variables, the outlook tilts towards optimism on the sector’s prospects.

Strength	Weakness
Multi-year digital & cloud growth	Fear of recession
Improved capital allocation	Rising interest rates
Stable earnings	Growing geopolitical risk
Growing tech intensity across industries	High inflation
Declining attrition rates	Valuations

In line, we maintain a positive outlook on the sector from the near to the medium-term point of view and recommend proportionate buying-cum-accumulation that can be looked into in this segment for the next six to twelve months.

NIFTY IT: Outlook

Illustration: NIFTY IT & NIFTY50 index comparative line charts

(Source: Fisdom Research)

Illustration: NIFTY IT

(Source: Fisdom Research)

• Comparative performance analysis of NIFTY50 vs NIFTY IT reflects a widening divergence and steep underperformance by the NIFTY IT Pack. The underperformance divergence is the widest since the months immediately preceding Mar-20.
• Historically, it has been observed that a divergence of such significance does not sustain for long and that the spreads move to quickly narrow.
• The current divergence ratio builds a strong case for the gap to be bridged and more so through an uptick in the lower NIFTY IT basket.
• NIFTY IT, trading at a crucial strong cushion zone of 28000 – 26000, can witness accumulation, followed by a pull-back towards major mid-term hurdles of 31000 & best-case scenario of 34000 levels.
• Even in case the NIFTY50 pack declines significantly to narrow the gap, the same may not be adequate to bridge it to comfort zone extents. Even in such a case, we can expect the NIFTY IT pack to move up and contribute to narrowing the gap.
• In a challenging environment and development, the downside for NIFTY IT looks capped to a fair extent. The segment can be viewed as a defensive play at the moment.

Analyst commentary on highlight stocks

1. Tata Consultancy Services

(TCS) LTP 3374.20 (S@3200/3000; R@3550/3600)

(Source: Fisdom Research)

Technical Commentary:

• TCS closed the week above the 60-Weeks Moving Average Support levels of 3307 for first time since Nov-21
• The counter has formed decent mid-term base at around 3200 levels over the past one & half months.
• Technically, the immediate bias is “Buy-On-Dip” towards 3320 & lower support levels with stop below 3240 or 3180 levels on a daily closing basis.
• On the higher-end, the counter can target major mid-term hurdle of 3480-3500 levels which need to be held for fresh break-out towards 3800 levels once again through following months.
• Overall, immediate short to mid-term bias remains “Range to Up” above supports of 3240 & major 3150 levels

Q3FY23 Earnings: Key Highlights:

• TCS beats revenue estimates with missed profit growth estimates.
• Q3FY23 growth was broad-based in terms of verticals and geographical expansion, further boosted by strong demand in cloud computing and market share gains.
• The attrition rate declined to 21.3% in Q3FY23 compared to 21.5 in Q2FY23. It is a big positive.

Q3FY23 Earnings: Management Commentary:

• Management believes the quarter was better than their expectations regarding revenue and margins. Order books remain at $7.8 bn, within the guided range of $7-9 billion quarterly.
• Demand scenario remained intact; however, there might be challenges in decision-making from Europe businesses amid geopolitical conditions.

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2. Infosys LTP 1503.50

(S@1450/1350; R@1650/1700)

(Source: Fisdom Research)

Technical Commentary:

• The stock has immediate support at around 1450, followed by major support at 1350 levels.
• Pull-back strong resistance zone cum interim target at 1650 – 1700 levels.

Q3FY23 Earnings: Key Highlights:

• Infosys beats both revenue and profit estimates.
• Total contract value was the strongest in the last 8eightquarters at $3.3 bn.
• Attrition rate has declined to 24.3% Q3FY23 vs 27.1% in the previous quarter.

Q3FY23 Earnings: Management Commentary:

• The company sees further attrition decline in the near term.
• The company continues to benefit from market share gains and vendor consolidation amid a changing global economy.
• Bulk deal pipeline sees improvement amid an increase in automation and cost-efficient programmes.

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3. Wipro LTP 393.65

(Base at 370 – 350; Breakout above 450 to chase 550/600)

(Source: Fisdom Research)

Technical Commentary

• Wipro in the process of base formation at around 370-350 zone
• Interim hurdle is at around 450 & above, at which the ongoing “negative pattern” can be negated
• Stock has break-out above 450 and can attempt towards 550-600 zone in quarters to come

Q3FY23 Earnings: Key Highlights:

• Wipro beats estimates on both revenue and profit terms.
• The company recorded total bookings of $4.3bn in total contract value terms, which is a growth of 26% for the quarter.
• Attrition rate declined to 21.2% in Q3FY23, an improvement of 180 bps vs the previous quarter

Q3FY23 Earnings: Management Commentary:

• The company showed strong performance in terms of margin growth after absorbing the costs made by employees. The margin expansion resulted from solid operational performance and automation-led cost efficiencies.
• The total deal wins were strong with signing a single large deal of $1 bn.
• The company has reported a consistent decline in attrition rate over the past four quarters.
• The company can constantly capture market share due to higher win rates and deepening client relationships.

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4. Mphasis LTP 2035.25

(S@1900; R@2200/2600)

(Source: Fisdom Research)

Technical Commentary:

• Stock may consolidate between 1900 & 2200.
• Interim hurdle at 2200 and major hurdle cum target is at 2600 levels. Any break out above 2200 can trigger fresh buying interest.
• Immediate bias: range to down below 2200.

Earning Commentary:

• Q3FY23 results still need to be out, but the stock has reported good Q2 results. Strong deal wins acceleration and a healthy pipeline will further assist companies’ growth. Also, higher offshore-centric revenues, pyramid optimization, improved utilization, and premium pricing will improve margins.
• It has placed itself as a strong competitor with its differentiated capabilities in the IT industry. Its growth drivers remain untouched to grow in the coming years. Hence, we are giving a buy rating to the stock with a target price of Rs. 2,600.

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5. Persistent Systems LTP 4005.90

(Silverline @ 3800; S@3700/3300; R@4200)

(Source: Fisdom Research)

Technical Commentary :

• Pattern study reflects a major silver line @3800 between “bulls & bears”.
• Major interim resistance at 4200 below which bias is “upside capped.”
• On an Immediate basis, the counter supports are at 3700 & 3300 levels
• Interim outlook is to buy on dips towards interim supports

Earning Commentary: 

• The company has attained US$1 bn revenue on a quarterly annualised basis and is now aiming at US$2 bn annual income in the medium term.
• It acquired five companies in FY22, building credentials in payments, cloud, etc. Persistent is staying in acquisitions in the coming years as well. Strong deal-win momentum will help improve its revenue growth.

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