Do you own Infosys, TCS or Wipro: What should you do with tech stocks?

IT stocks in India

The Indian IT sector has been a tough space in the last one year. Investors who invested in major IT companies like Infosys, TCS and Wipro have not gained in the last year. Let us look at the share price of these three tech giants. We will also look at the target price of these three companies and other IT companies in the last section.

If you look at one-month and one-year returns, we can see that the stocks have not performed well in the last one year. However, the IT sector has been one of the best-performing sectors for years. Look at the return numbers in the below table.

Infosys, TCS and Wipro: Quick update from Goldman Sachs

IT majors Infosys and TCS crashed upto 5% on Wednesday, after Goldman Sachs downgraded these stocks to ‘Sell’ from ‘Buy.’ The foreign brokerage firm said a potential slowdown in dollar revenue growth in the face of impending macroeconomic stress is impacting the shares. Goldman has upgraded Wipro to "buy" from "sell," citing attractive valuations and a recent pickup in the company's order book.

According to Goldman, the EBIT margin should not be hurt much given multiple levers such as higher employee utilisation, controls on variable pay and annual wage hikes in the IT companies, even as the revenue may take a hit.

What is happening with the IT sector in general?

In this section, we will look at some reasons that are impacting the IT sector.

The IT sector is under pressure as a result of the recent global recession fears. The recession is likely to hit the US first and most IT companies' highest revenue comes from the US companies. If a recession hits, the Indian companies will be impacted. The market is taking into account the recession risk.

Geopolitical and macroeconomic factors are also one of the biggest reasons for the recent downfall in IT shares. With rising inflation, the central banks are increasing interest rates. As the interest rate rises, it affects several economies and impacts the business performance of IT companies. 

Also, all major IT companies have reported their Q1FY23 earnings, and there was one common thing - most of them were struggling with operating margins. However, the reasons were nothing to be worried about, and part of the cycle - wage increase, subcontractor expenses, travel & visa-related expenses acted as major headwinds.

There has been a huge fall in the valuation since last November for all IT companies. In general, the valuations of IT companies are trading at 30x - 35x PE. Investors usually see potential in other companies where the valuations are around 18x - 20x P/E. In the past ten years, IT sectors used to trade on 18x 1 year forward P/E. Now it is trading at 24x 1 year forward PE. Hence, investors are staying away from the space.

INR-USD equation: How IT companies may benefit from it?

Not all is gloomy for IT companies, there are some positives for them in the present scenario - the depreciating rupee. The Indian IT sector is export-led, and more than 50% of IT companies' revenue comes from the US. Indian IT companies profit from forex gains when the US dollar strengthens. As per reports, a percent depreciation of the rupee improves margins of IT service providers by nearly 30-40 basis points.

Share price of IT companies with Analysts' views

Infosys share price: Deepdive

Infosys Share Target Price: Analysts’ view

IDBI Capital: They have changed the rating from BUY to HOLD post the Q1FY23 results and have given a target price of Rs 1510 per share. They said that there are certain pockets of weakness in retail and mortgage which will dent revenues in the longer run. In addition, lowering margin guidance is another dampener.

Antique Stock Broking: They have lowered the target price to Rs 2,050 from Rs 2,100 but have maintained the BUY rating on the stock. The firm said that Infosys has been outperforming peers over the past few quarters due to the ramp-up of large deals, which has been missing in the past few quarters. They see deal momentum coming back in FY23 and forecast Infosys' medium-term growth to be similar to TCS, and expect the pay-out ratio to improve gradually.

Prabhudas Lilladher: The firm has trimmed the target price from Rs 1646 to Rs 1630 posts its Q1FY23 results.

TCS share price: Deepdive

TCS Share Target Price: Analysts’ view

ShareKhan: The brokerage firm has given a BUY call with a target price of Rs 3,650 per share. They have revised downward their earnings estimates by 0.7%-1.2%, factoring in the possibility of a US recession, lower-than-expected margin performance in Q1, and continued supply-side challenges, partially offset by the INR-USD reset.

HDFC Securities: The firm has given an ADD rating with a target price of Rs 3620 per share. In its report, the brokerage cited TCS’ superior execution metrics, full-stack portfolio, and industry drivers remain intact.

Emkay Global: They have maintained a HOLD rating and revised the target price to Rs 3250 per share. They have cut FY23-25 EPS estimates by 1-3% due to the Q1 miss. The demand environment remains healthy in the near term. However, macro uncertainties weigh on valuations.

Wipro share price: Deepdive

Wipro Share Target Price: Analysts' View

Edelweiss: The firm has given a BUY rating with a target price of Rs 851 per share. As per the firm, Wipro has delivered strong bookings and its pipeline continues to be solid. They have cut FY23E/FY24E EPS by 4.5%/4.7% and rolled over the valuation to Q3FY24E.

ShareKhan: The research firm has given a HOLD rating with a target price of Rs 460 per share. They expect Wipro to report USD revenue/earnings CAGR of 10 %/5% over FY2022-FY2024E. At CMP, the stock trades at an expensive valuation of 19x/17x its FY2023/FY2024 earnings estimates. They believe the company has limited margin levers to offset headwinds in the next couple of quarters.

Motilal Oswal: They have given a NEUTRAL rating with a target price of Rs 390 per share. They lowered FY23/FY24 EPS by 7%/6% to factor in the margin miss. They maintained a Neutral stance as they await - further evidence of the execution of WIPRO’s refreshed strategy, and a successful turnaround from its growth struggles over the last decade before turning more constructive on the stock.

HCL Tech share price: Deepdive

HCL Technologies Target Share Price: Analysts' view

CLSA: CLSA has given OUTPERFORM rating for HCL but has reduced the target price to Rs 1000 per share. The firm has cut FY23 and FY24 earnings per share estimates by 2% and 4% on conservative margin assumptions. It added that margin weakness appears priced into the inexpensive valuations.

Nomura: The brokerage firm has given a NEUTRAL rating with a target price of Rs 1000 per share. It sees HCL missing margin guidance in FY23.

HSBC: The firm has maintained a BUY rating and has reduced its target price to Rs 1180 per share. It said that HCL's idiosyncratic risks have moderated, macro risks remain, and we expect demand to slow down in the coming quarters, starting with Europe, which may remain a headwind for IT stocks in the near term.

Mindtree share price: Deepdive

Mindtree Target Share Price: Analysts' view

Edelweiss: The analysts' at Edelweiss have given a BUY rating with a target price of Rs 4,917 per share. The firm believes a successful integration (LTI and Mindtree merger) can create strong cross-selling opportunities. Overall growth and TCV were strong.

JM Financial: The firm has given a BUY rating with a target price of Rs 3290 per share. They have raised FY23E EPS driven by 1Q beat though moderate FY24-25 revenue growth slightly given macro volatility driving 2-3% cuts for FY24/25. As per the firm, Mindtree’s performance stands out in contrast as it delivered a 5.5% sequentially c/c growth marking the 6th successive quarter of 5%+ growth.  

L&T Infotech share price: Deepdive

L&T InfoTech Target Share Price: Analysts' view

ICICI Direct: The firm has given a BUY rating with a target price of Rs 4725 per share. It added that the volatility in the stock is expected to subside in the coming days. The firm believes that fresh gains are likely to be seen in the stocks. 

Tech Mahindra share price: Deepdive

Tech Mahindra Target Share Price: Analysts' view

CLSA: They have downgraded the stock to UNDERPERFORM and cut the target price to Rs 1070 per share. They believe TechM's low margin threshold makes a quick rebound both difficult and vulnerable to long-term implications, more so given the macro risks. 

CompanyCurrent Price Target Price
TCSRs 3,242.95

Motilal Oswal: Rs 3,730

ShareKhan: Rs 3,650

HDFC Securities: Rs 3,620

InfosysRs 1,536.20

IDBI Capital: Rs 1510

Antique Stock Broking: Rs 2,050

Prabhudas Lilladher: Rs 1630 

CLSA: Rs 1,750

WiproRs 422

Edelweiss: Rs 851 

ShareKhan: Rs 460

Motilal Oswal: Rs 390

L&T InfotechRs 4,812.10ICICI Direct: Rs 4725
HCL TechnologiesRs 955.55

CLSA, Nomura: Rs 1070

HSBC: 1180

MindtreeRs 3,392.45

Yes Securities: Rs 3,920

HDFC Securities: Rs 3,830

Tech MahindraRs 1,150.10CLSA: Rs 1070

 What should investors do?

IT companies have been under margin pressure, and recession fear, but the fundamentals still look strong for most IT companies. They have a strong order book, and the INR-USD equation will provide some relief.

ICICI Securities has said that despite minor pain in select verticals of IT companies, they don't see a downward revision in revenue growth guidance for FY23.

Investors can pick the IT stocks across categories (small, mid, and large-cap) as per their risk profile and invest in them via SIP. The IT sector has been one of the best performing sectors for more than five years now. The current fall can be used as a buying opportunity.