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IT stocks attractive for 3-year timeframe Surjitt Singh Arora

07 Aug , 2022   By : Kaushiki Mehta

IT stocks attractive for 3-year timeframe  Surjitt Singh Arora

As seen on a year-to-date basis, none of the stocks in the Nifty IT index are in the green. Large-cap IT stocks like Tech Mahindra NSE 0.20 % and WiproNSE 1.03 % have eroded up to 41 per cent of their market cap. Surjitt Singh Arora, Portfolio Manager-PMS, PGIM India, said that the risk-reward is now favourable in large-cap IT stocks, with majority of global concerns getting priced in. “From a three-year perspective, given the strong cash flows and business fundamentals, valuations are coming into an attractive zone,” he said.

Edited excerpts from an interview:

How has your outlook changed towards bank stocks after going through their Q1 numbers as well as management commentaries?

We are positive on the Banking & Financial Services (BFSI) space. In a rising interest rate environment, the ability of banks to reprice assets is higher, we believe they are in a better position to improve their Net Interest Margins (NIMs). As a result, banks could see better profitability. In addition, given better asset quality metrics,healthy provisions and sufficient capital levels, we remain positive on this space. Credit growth will be key for outperformance

Compared to IT stocks, do you find bank stocks better placed for the rest of this calendar year?
Yes, we prefer banks as the worst of NPAs is behind us, and the credit growth is picking up. Domestic macro data reflects a swift recovery in the economy, whether it is automotive sales, IIP growth, credit off-take or increasing e-way bills. Given the recessionary fears in the US, we prefer domestic-oriented sectors vs export-oriented ones.

Within the IT basket, where do you find valuations attractive at this point?

Largecap IT valuations have corrected sharply. After the recent correction, the risk-reward has become favourable, with majority global concerns getting priced in. Most IT services companies are currently trading at FY24 PEG of 1.3-1.5x. However, if North America’s economy goes into recession or goes through a prolonged phase of stagflation it could lead to cuts in IT spending and earnings downgrades. We remain selective and are neutral on the sector v/s broader market. From a three-year perspective, given the strong cash flows and business fundamentals, valuations are coming into an attractive zone.

Do you see signs of slowdown in demand for IT exporters?
Good quality IT companies offer healthy balance sheets, strong cash flow generation, good corporate governance standards and decent earnings growth visibility. Overall, the demand environment remains strong as per the management outlook of IT companies, deal wins continue to be healthy, and hiring trends seem encouraging. Any incremental INR depreciation will support earnings. However, given the recession fears in the US, there is a possibility that the demand might slowdown in the coming quarters.

Where do you see Nifty by the end of this calendar year?
Overall, the earnings season in India was in line with expectation, while revenue growth was ahead of expectation, indicating a healthy demand environment.

The current relief rally is of similar magnitude as seen in past episodes of post-recession market performance. Accordingly, the market may remain sideways in the near term as valuations are now above long-term averages. Considering the uncertain environment and slowdown in global growth, from a 3 to 5-year perspective, we remain constructive on Indian equities, given that the Indian economy would be one of the fastest growing economies in the world.

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