Infosys, Wipro, HCL Tech, TCS: IT sector's Q4 performance declines 6%; what next?

IT sector outlook: With the Q4FY24 result season underway, major blue-chip information technology (IT) companies like Wipro, HCL Tech, L&T Technology Services, Infosys, and others have reported mixed performance.

Q4FY24 profit after tax of major IT companies

As per Sunil Damania, Chief Investment Officer, MojoPMS, the IT sector underperformed in Q4FY24 and experienced a decline of approximately 6 per cent. This decline is primarily attributed to concerns about the business outlook. 

Backing the above statement Damania said, "In the current landscape, major IT companies are adopting a cautious stance due to macro uncertainties and geopolitical volatility. Analysis of the market reveals a tepid environment for discretionary spending. Clients are prioritising projects that yield immediate Return on Investment (ROI) while conserving cash."

How will the IT companies go ahead? 

As per Vinod TP, Research analyst, Geojit Financial Services, the Indian IT services industry is poised to continue moderate revenue growth in the near term on concerns over macroeconomic conditions and inflationary headwinds. 

Consequently, MojoPMS' Damania does not expect robust topline growth in the IT sector. 

What should investors do? 

Damania believes that from an investor's point of view, many negative factors have already been baked into the current price. Although several challenges persist, certain positive factors should be considered. 

"Firstly, supply-side issues have been mitigated with a drastic decrease in attrition rates, leading to minimal increases in workforce costs, a major expense for IT companies. Secondly, AI presents a significant opportunity akin to the emergence of cloud and digital technologies a few years ago," said Damania. 

While touching on valuations, Damania said only a few companies are trading at rich valuations, indicating limited downside risk. 

Damania believes that if the overall market sentiment turns negative, investors are likely to move toward the IT sector. This will be on the back of strong management, robust balance sheets, and high corporate governance standards. 

Thus, while the sector may experience some corrections in the near term, the medium to long-term outlook remains excellent.

Similarly, Geojit's stance remains 'neutral' for the IT sector in the short term but is optimistic from a long-term perspective. As per Geojit's Vinod TP, in the near term, suggests focusing on high-quality stocks particularly those operating in niche areas that can showcase strong revenue growth.

Vinod advised long-term investors to adopt an accumulation strategy that will focus on companies with strong balance sheets. He prefers companies involved in AI and Gen AI technologies with strong deal wins, and those companies derisking by diversifying across different sectors.

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