Invest in Tech Stock Market even when Infosys, TCS and Wipro are cheap; But hold for a year

Indian stock market changed by over 30% in the last few months due to Coronavirus Pandemic. This situation brought a lot of stress to long term investors who aimed to reap benefits in FY 2020, but it also a blessing to some other people. IT Stock Market fell by 21% in the last one month; 32% after the COVID-19 Pandemic. Nifty IT is priced at ₹ 11,680 on Friday, April 3. The 52-week low is ₹ 10,991, and high is ₹ 16.882.

IT sector contributed 7.7% to the country's GDP in 2018. The Technology Market Cap is ₹ 12,82,916 Cr. Top stocks include TCS, HCL, Wipro, Infosys, Tech Mahindra, Just Dial, Mindtree etc.

COVID-19 pandemic has affected a lot of companies. A large part of the workforce is working from home, clients are spending less as a discretionary measure and the results are visible through weak inflow in the Quarter 4 of FY 20. But, NSE Analysis, in its three-year trend shows a different story. Sectors like energy, pharma, banking, MNCs and services are running in minus profit percentage. The IT sector, though, has 13.70% profit. Nifty IT provides investors and market intermediaries with an appropriate benchmark that captures the performance of the IT segment of the market.

Information Technology (IT) industry has played a major role in the Indian economy. The reasons for this could be the growth in demand for IT products, diversified verticals under telecom and retail and MeiTY's Start-up Hub portal. Start-ups under Start-up India have tax exemption for 3 years within the initial 7 years. The Indian IT sector is a low-cost industry. It significantly reduces the cost by 5-6 times compared to the US.

Indian companies also aim to add USD 1 trillion to the world economy via Artificial Intelligence and Machine Learning by 2035 (via IBEF). Also, Revenue from the digital segment is expected to comprise 38 per cent of the forecasted US$ 350 billion in industry revenue by 2025.

Now, IT industries are virtually debt-free and they are growing in reserves. Thus, when the market recovers, Large-cap companies like TCS, Infosys and HCL will be first to recover. Their business models are stable and their valuations are steady. Mid-caps will take some time, but they too will recover. This will take up to a year still. The major reason for this long gestation period can be the fact that clients are deterring deals in this quarter. This may pick back up in Q3FY21. Phillips Capital even stated that even during this fall, the valuations of these IT companies are far from the trough of the 2008 crisis.

China has taken a huge hit in the pandemic. News of over 200 US companies wanting to shift their base in India is also doing rounds. In that case, the BPO industry will also see a rise. The BPO industry is a technology-rich area. RM prepared a report on the growth of the BPO sector between 2018-22. The report suggested that "The latest trend gaining momentum in the market is the access to new technology, domain expertise, and round the clock service."

What Stocks should you buy during this lockdown?

The top five stocks recommended by Phillips capital are:

(YoY predicted growth)

1. HCL Technologies

HCL Technologies shows the most promise with 2% growth estimated even with Coronavirus in FY21 and 9.8% in FY22, second only to Infosys. It is also a relatively stable business and trades in the range of 12-14 points. HCL also has Market capital of ₹ 110,121 Cr. Its reserves have gradually grown and can sustain a longer period of gestation.

2. Infosys

Infosys took a dip only twice before recovering. It is expected to be stable in the coming year while shooting up to 10% growth in FY 22. Infosys has a market capital of ₹ 249449.19 Cr. It is currently trading near its 52-week low. The company has zero borrowings. Which means, that in cases of profits, Infosys keeps everything home. Infosys is the most promising company in the IT sector.

3. TCS

Phillips Capital states that TCS has the most stable business and should have a lower impact due to the pandemic. TCS has a Market Capital of ₹ 620,719 Cr. It is trading very close to its 52-week low. The stock took a smaller hit compared to its competitors and yet reached its 52-week low in the past 30 days. This means that the stock has always performed well. It also has the backing of one of the most prominent business groups in India.

4. Tech Mahindra

The authors of the report also stated that Tech Mahindra showed higher reliance on subcontracting and the margins will be impacted disproportionately. Tech Mahindra managed to grow EPS by 16% per year, over three years. That’s a good rate of growth if it can be sustained.

5. Wipro

According to the report, Wipro has a relatively inferior clientele. It has also been a consistent under-performer. It reached its 52-week low. certain analysts also ask to stay neutral on Wipro due to its consistent low price, yet in large-cap shares, Wipro looks like an opportunity.

The authors at Phillips Capital viewed the zero-revenue growth scenario in FY21, to be the base case scenario for the sector – as of the current situation. If the COVID-19 pandemic worsens, we could even see a revenue decline for the companies.

On the other hand, if the situation is brought under control earlier than expected and/or Indian IT companies can sustain business operations – they might also report 0-3% growth in FY21, which as of today, looks hard. The year 2022 looks like a selling platform if you buy these stocks today.

"We believe a recovery in Indian markets (if and when) will probably be led by domestic consumption stories, and the IT sector might see a longer gestation period. Nonetheless, it could be a good time to accumulate some quality names in the IT sector, at highly attractive valuations, for a longer investment horizon," says Vibhor Singhal, Research Analyst at Phillips Capital.