Will IT stocks get back their mojo in 2018?
Mumbai: Beaten-down technology stocks have rallied firmly in 2018 on expectations of better earnings in the September-December quarter, and relief that there are no adverse visa regulations planned by the US. So far this year, the BSE IT index has rallied 2.85%, outpacing benchmark indices Sensex and Nifty which are up around 1%. In 2017, BSE IT was up 11% while Nifty jumped 28%.
According to analysts, despite the third quarter being traditionally weak, operating performance of IT firms is expected to be stable in Q3, supported by increased automation and higher efficiencies. Cross-currency impact will be minimal in this quarter. HDFC Securities Ltd said the IT sector is expected to be impacted by December quarter seasonality and yet post mild revenue acceleration.
“Revenue growth is expected at 1.2% quarter-on-quarter (QoQ) and 9.1% year-on-year (YoY). Our bullish stance on tier-2 IT has been validated by a sharp rerating in the prior quarter and we continue to be positive on the midcap IT space,” it said in a report on 10 January.
ICICI Securities Ltd expects organic revenue growth in constant currency terms to improve for all large cap companies within its coverage universe in FY19, with Wipro seeing the largest acceleration and TCS the lowest. “We see large cap IT (excluding TCS) as being egregiously under-priced, especially in the context of our expectation of positive second derivative on revenue growth in FY19 as well as improving capital allocation across the board,” it said in a report on 2 January.
Analysts say commentary on client budget for 2018, impact of changes in US tax policy, outlook on banking, financial services and Insurance (BFSI) and retail verticals, penetration of digital services and automation impact across service lines will be key factors to watch out in Q3 results.
However, according to Motilal Oswal Securities Ltd, the technology sector is expected to report another lacklustre quarter, with a 4% net profit decline, a multi-quarter low. “Amongst the tier I names, only Wipro is expected to deliver earnings growth of 2% while Infosys, TCS, HCL Tech and Tech Mahindra are expected to post earnings decline of 5%, 6%, 0.4% and 15% YoY, respectively,” it said.
In anticipation of earnings, TCS shares had rallied to three-year three-year high at Rs2,812 on Wednesday but it soon fizzled out today. At 11:30 am, TCS was trading at Rs 2787.45, down 0.70% on the BSE.