Trump shadow on stocks offers easy Infosys entry

While IT stocks are under pressure, investors are staying away from Wipro because of its continued weak growth

With Republican candidate Donald Trump narrowing the gap with Democratic counterpart Hillary Clinton in the run-up to the US presidential elections, the stocks of domestic information technology (IT) firms plunged on Thursday.

Stocks of Infosys, Wipro touched 52-week lows, even as HCL Technology and Tech Mahindra fell on Thursday. Tata Consultancy Services (TCS) was the only IT biggie to give positive returns. This was because it has a more diversified revenue model than its peers.

However, most analysts believe recent fall offers an attractive entry point in Infosys.

Trump is known to be in favour of protectionist measures, such as stricter visa norms to curtail jobs for Indian and other non-US employees. Though it remains to be seen how much of this election rhetoric actually translates into action, the US elections will continue to weigh on IT stocks nonetheless, believe analysts.

  Ashish Chopra, technology analyst at Motilal Oswal Securites, said, “I think Trump’s stance against Indian IT is very clear. The first question is whether he gets elected and second is, if he takes over in January, whether it will culminate into yet another hostile Bill in the US Congress. Those issues are keeping investors away from the sector and this pressure is likely to continue.”

One, at current levels the scrip is trading at 15 times FY17 estimated earnings which is undemanding and seems to capture most of the concerns. Second, even at it’s toned down revenue growth guidance of eight to nine per cent for this financial year, Infosys is likely to post industry leading growth.

“We like Infosys because we remain convinced that Vishal Sikka (CEO) will turn around the business as almost all operating metrics show improvement and current valuations too are attractive,” said Sagar Rastogi, technology analyst at Ambit Capital. Notably, Infosys has been witnessing improving momentum in both new deal wins as well as deal sizes in recent times.

On the other hand, investor sentiment continues to be cautious on Wipro scrip which also made a new 52-week low on Thursday. This is because the company has consistently lagged industry growth over the past few quarters now. Its forecast of -1 to one per cent sequential movement in constant currency organic revenues for the on-going quarter is rather muted indicating that the company still continues to struggle. Weak show of energy vertical (13 per cent of revenues) as well as limited success in ramping up client mining are the key pressure points/monitorables for the company, believe analysts. At 13 times FY17 estimated earnings, Wipro stock is the cheapest among large IT companies. However it has to witness sustained improvement in growth for investor sentiments to turnaround.

The Indian IT sector is going through a structural change as it realigns its business model to the next growth engine of digital technology. Macro headwinds such as Brexit and US elections have only added to the woes. Though Infosys’ exposure to Europe is amongst the lowest, coming quarters will be a test of analysts’ faith in Infosys. The strategies and agility with which IT companies adapt to the changing macro scenario will determine their prospects. Thus, though investors can consider Infosys post the correction, next few quarters will throw more clarity on how the macro headwinds unfold.