If we carefully examine the portfolio of mutual funds, you would realize that IT stocks, which once were top of the list are no more. In fact, HDFC Bank is now on almost every top large cap mutual fund holding, as the number one. IT stocks are gradually making way for banking stocks. IT stocks are heading lower. It is not only Infosys, but, stocks like Wipro and MindTree, which have also slumped to new 52-week lows. Should you be buying the Infosys stock now is the obvious question?
The problem for the IT sector
Client spendings have actually contracted and there is no doubt about that. We are not seeing growth rates like before, across the globe and this is impacting the sector. IT companies get larger orders from the Banking and Financial Services and Insurance Business (BFSI) and that is called BFSI. But, look at the problems with Deutsche Bank in Europe and you would know how difficult it is. RBS recently cancelled a contract with Infosys. Some say robotics and newer digital technologies will make it increasingly difficult for IT companies in the future.
Energy sector compounds the problems
Oil and gas prices have fallen and this has also impacted the performance of IT companies like Wipro. From the top 10 clients of Wipro, three are from the energy sector. With crude oil prices tumbling from more than $100 a barrel a few years ago, to the current levels of $48, there is no way clients like BP, Exxon Mobile etc., are going to increase their spendings. This is another area that IT stocks will take a hit.
But valuations of Infosys remain attractive
However, we believe that valuations of Infosys continue to remain attractive, even given the fact that the company has cut guidance for the current year. For the quarter ending Sept 30, 2016, the company reported an EPS of Rs 15.11. Even next year (2017-18) if the company can report an EPS near Rs 65, the stock is trading at a p/e of just 15 times. Given that it regularly pays dividend, and the dividend yield also works to 2.42 per cent, it is not a bad bet, if you get it near the Rs 980 levels.
Is it time to pick TCS as well?
While Infosys had this quarter as a bad quarter, with TCS it has been a few successive quarters that have been bad. The question to ask yourself is: Will it be a structural decline at TCS? It is difficult to say. Some reports suggest that companies like Accenture have embraced newer technologies faster, which has led to better growth. For us at the moment TCS is a much bigger risk than Infosys. The one good thing is that opinion polls in the US show that Donald Trump behind Hillary Clinton in the race to become US President. In case, Donald Trump does become the US President, there will be a fresh risk to IT stocks from the H1 B Visa issue. In any case, IT stocks look like a big risk now.
From the IT basket, only Infosys looks the better bet.
The article is not a solicitation to buy, sell in securities or other financial instruments. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author do not accept culpability for losses and/or damages arising based on information in this article.