Coronavirus crisis has made Infosys, TCS, and HCL Tech stocks so cheap, this may be the time buy — but hold for at least a year
- IT stocks have fell by 30% during the Coronavirus crisis.
- Phillip Capital estimates that IT stocks stand a good change to recover if you can hold your investment till financial year 2021.
- Large caps like TCS and Infosys will be the first to recover since their business models are stable and valuations remain attractive, according to the report.
In fact, the report says it’s a good time to pick up IT stocks if you can lock yourself in for the long haul.
“It could be a good time to accumulate some quality names in the IT sector, at highly attractive valuations, for longer investment horizons.”
Even though IT stocks have dipped more than expected — 32% on average and 27% on the Nifty IT index — Phillip Capital points out that their valuations are still far from the troughs of 2008. In addition, most of these companies are cash-rich with strong cash flows, offering dividend yields between 2 to 5%.
If and when, the Indian markets recover — it will be led by domestic consumption. Large caps like TCS and Infosys will be the first to recover since their business models are stable and valuations remain attractive. Mid caps will also recover, but it will take a longer gestation period.
Which IT stocks should you buy during the Coronavirus lockdown?
|Company||Dollar Revenue Growth Estimate (%)|
HCL Technologies shows the most promise with 2% growth estimated even with Coronavirus in FY21 and 9.8% in FY22, second only to Infosys.
Infosys may be stagnant in the coming financial year but is set to shoot up to 10.1% in FY22.
TCS, India’s biggest IT company, also shows promise is expected to recover in FY22 and hit 9%.
Immediate impact of Coronavirus on IT companies
Even though recovery of IT stocks is likely, there will be an initial slump before things get back on track, according to Phillip Capital. The pressures of moving large parts of the workforce to work from home and the clients being affected will bear down for the next two quarters.
Since deals are being deferred this quarter, they will suffer from weak order inflow during the fourth quarter of 2020. Although revenue may start to grow in the next quarter, the uptake will be slow as order inflow starts to trickle in again.
“We assume recovery to start gradually in Q3FY21, and possibly back to normalcy by Q4FY21 end or Q1FY22,” said the report.
During the slump, organic revenue growth will be all but stagnant, margins are expected to fall by 0.5 to 0.9% and the growth estimates for all companies for the current financial year have been cut by an average of 10%.
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