Are IT stocks a good contrarian bet from a one-year perspective?

IT shares have been among the worst performers on the bourses this year as hawkish global central banks continue to risk global growth prospects.  

Amid rapidly rising fears of a recession in the West, the Nifty IT index is down over 30% so far this year as against a 2% cut in the Nifty benchmark index. Top losers from the IT index include Wipro, Tech Mahindra, Coforge and Mphasis, which have corrected 39-44% during this period.

While the near-term outlook remains volatile, analysts still see the sector as a good contrarian bet from a long-term perspective. This, they say, will be aided by cheaper valuations and the sharp depreciation of the rupee against the US dollar.

Gaurang Shah, Head Investment Strategist, Geojit Financial Services says, IT remains a preferred bet from one-year perspective. Sector correction healthy; valuations attractive. Add stocks in a staggered manner amid market consolidation, he says. His top picks are TCS, Infosys, HCL Tech and Tech Mahindra. 

While some pressure could continue on IT companies’ margins in the next few quarters, analysts expect this to improve by the next fiscal. This could be driven by reduced and/or frozen variable staff payments by companies to slash their employee costs.

As per Elara Capital, the variable payout cuts hold the potential to lend material margin support. These can translate into operating margin support of 220-400 basis points for Infosys and Wipro. “Further, consensus estimates have factored in an average EBIT margin improvement of around 80 bps in FY24 for large-cap IT firms,” it says.  

Sharing a similar view, Apurva Prasad of HDFC Securities believes that the margins for the industry have bottomed out in Q1FY23 amid moderation in attrition. 

Apurva Prasad, Research Analyst, HDFC Securities says, investotrs should have a constructive view on IT. Some core verticals like BFSI look fairly strong. Indicators by large-end clients remain firm. Demand likely to stay resilient.

That said, markets may exhibit volatility today on account of the monthly F&O expiry, and the Street's reaction to the minutes of RBI’s last meeting released on Wednesday.