IT stocks to buy: IT stocks at inflection point? Both FIIs, mutual funds up stake in Q3

Betting that IT stocks could be traversing an inflection point as the growth momentum may bottom out over the next few months and a return to growth over CY24 on the back of easing of several headwinds and new drivers taking over, both FIIs and mutual funds increased their shareholding in most largecaps.
MF holding in Tech Mahindra rose 188 basis points to 14.24% at the end of the December quarter. In Wipro, both FIIs and MFs raised stake by 23 bps and 38 bps, respectively. FIIs showed faith in HCL Technologies by upping stake by 62 bps to 19.42% and in LTIMindtree where the holding went up 54 bps to 8.65%.

While MFs pared stake in Infosys by 21 bps to 18.29% in Q3, FII ownership went up by 10 bps to 33.7%. In the case of TCS, there was hardly any change in shareholding of the big boys of Dalal Street.


In the top 4 IT companies, which have declared their December quarter results, BNP Paribas said revenue and margin came ahead of beaten-down expectations, thanks to ramp up of some of the large deals and cost control initiatives.

Analysts noted management’s positive tilt for a recovery. While Infosys talked about deal ramp-ups now running on schedule (unlike delayed earlier), TCS pointed to pent-up demand and BFSI returning to growth in March quarter, HCL Tech is seeing green shoots in ER&D space and expects a strong booking in Q4, and Wipro talked about demand stabilisation and pick-up in discretionary spends.

“Guidance of both Infosys and HCL Tech implies that YoY revenue growth will recover in Q4, after having fallen for the last several quarters. Companies’ guidance and commentary of green shoots are comforting to us and synonymous with our thesis that the IT sector is in its final leg of slowdown and we expect a strong recovery in 2HFY25E,” said Kumar Rakesh of BNP Paribas.

Notwithstanding the run-up in stocks seen in the bull market of 2023, fundamentals of software exporters have been weak over the past 12 months, led by global macro uncertainty that drove cuts in discretionary tech spends, delays in client decision making, and pushed out ramp-ups in several deals.

As revenue growth starts to accelerate, PE multiples tend to expand. “And hence we believe with FY24 being the bottom in terms of growth, as we start seeing growth acceleration (even if soft on an absolute basis) the PEs will continue to move up and not contract in CY24. Another factor that we believe could support stocks and PE is dividend/buyback yields. In a falling interest rate environment, dividend stocks become attractive for investors and hence stocks that have high dividend yields should find more support,” JP Morgan said.

Following a 6.5% rally in November and 9% in December, Nifty IT is up another 3% so far in January. While Persistent Systems, which announced impressive Q3 numbers and a stock split, is the top gainer in the sectoral index with 12% YTD return, Tech Mahindra and Infosys have rallied around 6-7% each.

BNP Paribas has picked Infosys, TCS and HCL Tech among its most preferred picks in the IT domain.

(Data: Ritesh Presswala)

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