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.
