Nifty IT at 1 year low, all stocks in red. Which stocks to buy/sell?

smelly IT fell 1,334.60 points or 4.71% to close at 27,008.20. However, the index declined by at least 7.6% during the day. It touched a new 52-week low of 26,184.45.

After falling nearly 15% on the day, Infosys out of stock 1,259 declined by 9.37%. The second largest IT company in terms of market share has also touched a 52-week low. 1,185.30 each.

Besides this, LTI Mindtree declined by 7%, Tech Mahindra declined by 5.2%, and Persistent Systems declined by over 4.1%. Coforge also slid 3.3%. Infosys rivals such as HCL Tech saw a 2.8% contraction, and Wipro and TCS shed 1.8% and 1.6%, respectively. Mphasis and L&T Technology Services were also down 1.75% and 2.6%, respectively.

Kotak Institutional Equities in its latest report said, “The earnings prints of TCS and Infosys had two common factors (admittedly, Infosys was a shocker compared to TCS): (1) Declining demand from North America with discretionary programs that were stalled or canceled and (2) an inability to flex margin levers as near-term costs are sticky at the onset of the downturn.”

Analysts here said, “Our structural view on margins and growth has not changed, even as we recognize elevated headwinds that could feed into multiples in the near term. Those trading at premium multiples after assuming higher growth and margin assumptions Stocks.”

The common challenge between TCS and Infosys was the slowdown in the US market and it was sharper than expected. Infosys and TCS reported sequential revenue declines of 3.8% and 0.8%, respectively, in North America.

“The decline in revenue in North America was vertical on a sequential basis. The decline was accompanied by pauses and even cancellations in discretionary programs. After a slow start in January, projects picked up in February,” Kotak’s note said. / was canceled and it continued in March.”

Furthermore, the brokerage’s report said, “We would not be surprised by a weaker US performance from companies likely to report in the coming days.”

After Infosys and TCS, HCL Tech on April 20, L&T Tech on April 26, while Tech Mahindra, Wipro, LTI Mindtree and Mphasis are next in line to present their Q4 results on April 27.

Kotak has ‘Buy’ advice on three IT stocks:

HCL Technologies target price 1,235 each.

Infosys: Despite short term risks, the brokerage is still bullish on Infosys shares and has set a target price of Rs. 1,470 each.

RateGain Travel Technologies : TP 450 each.

But the brokerage gives ‘Add’ ratings on 3 IT stocks:

Emphasis: tp off 1,950

TCS: TP 3,320

Tech Mahindra: TP 1,200

While target price for LTI Mindtree and Wipro has been given “REDUCE” recommendation 4,350 each and 370 respectively.

Additionally, the brokerage has ‘Sell’ recommendation only on L&T Technology Services with a target price of 3,000 each.

According to Kotak, his valuation on IT stocks is based on quick resolution of the global banking crisis and problems arising out of banking industry events that are local to BFS. The brokerage does not consider deep bearish in terms of its valuation base.

The note said, “Increasing recession prospects pose a risk to multiples. Better payout ratios of IT companies, full participation in the digital journey of customers, and completion of digital transformation journey of customers should mean medium-term growth.” That’s what stocks can do. Down by multiples higher than in prior recessions, assuming the same cost of equity as in the past. Stock valuations are not baked into recessions, but formed in recessions.

It added, “Large-cap stocks are ~15% away from building in a bearish scenario.”

At the same time, the brokerage also highlighted that growth for IT services companies has been democratic over the last two years as enterprises have spent aggressively on the digital journey. While digital spending will continue, a challenging environment will also force organizations to focus on cost. A greater focus on costs by enterprises, particularly in affected verticals, should create opportunities to extract various costs. Some aspects, such as optimizing cloud and SaaS consumption, can be addressed by a variety of players.

Lastly, Kotak’s note said, “TCS and Infosys are best positioned. HCLT and LTIM could benefit in select cases. Similar cost extraction opportunities, but addressed by a larger pool of companies among smaller enterprises.” It can be done. Many other companies in the space will struggle – there should be growth between the leaders and the laggards in FY 2024 and beyond.”