What happened to the legendary IT companies of India? The stock prices do not look like going up any time soon. Nifty IT has been down from the highs of 39000 in January 2022 to 28800 levels now. In terms of percentage, this falls equals 26%. The index has been teetering in between 26500 and 31500 levels since May 2022. The four IT Giants TCS(26.44), Infosys(23.99), HCLTech(9.51), and Wipro(9.76) make up to 70% of the NiftyIT.
Earlier after the Covid-19 crash, the Nifty IT had zoomed 213% from the March 2020 monthly close of 12760 to 39940 high in January 2022. This kind of move is surreal since the index had more than tripled in less than 22 months. The lockdown situations led to new technological advances and software-related stocks made a fortune. It is not uncommon for stocks to undergo a sizeable correction after such an impulsive move in a short time.
Some of the factors that led to the fall in Indian IT stocks.
- Fears of Recession in developed economies: The US and European nations are already facing the early signs of an upcoming recession. It could lead to lower demand for IT services.
- Geopolitical Tensions: The Russia-Ukraine war is still going on since February 2022. As it is not enough, the rising tensions between the US and China also have a big negative impact on the global economy. Obviously, these are headwind conditions for IT services.
- Rising Inflation: Inflation is a major concern for developed countries like the US, the UK, and other European nations. The IT companies and their customers are facing the brunt of higher costs. It has led to denting of profits for most of the companies.
- Artificial Intelligence: Automation and artificial intelligence have started replacing some of the IT jobs. The fears of losing IT services and jobs to AI are also impacting IT stock prices.
Performance of Top Four IT Giants in the financial year 2022-23:
1. Tata Consultancy Services (TCS): The TCS has posted sales of 225458 Cr in F.Y 2022-23, compared to 191754 Cr in F.Y 2021-22 up 17.5% YOY. Operating profit is also up from 53057 Cr to 59259 Cr, 11.6% up during the same period. The operating margin is a bit less than the previous year’s 28% but stable at 26%. The company has also increased its reserves to 90058 Cr from 88773 Cr after paying a mammoth 41410 Cr in dividends to its shareholders. TCS has the best ROCE of 59.1% among the top 4 IT companies. The shares of TCS are down around 20% from all-time highs of ₹4046.
2. Infosys Ltd: Infosys has posted sales of 146767 Cr in F.Y 2022-23, compared to 121641 Cr in F.Y 2021-22 up 20.6% YOY. Operating profit is also up from 31491 Cr to 35130 Cr, 11.55% up during the same period. The operating margin is slightly lower compared to the previous year’s 26% but tolerable at 24%. The company has also increased its reserves to 73338 Cr from 73252 Cr despite the share buyback worth 9300 Cr excluding taxes and paying dividends worth 13653 Cr. Infosys has the ROCE of 40.7%. The shares of Infosys are down around 33.4% from all-time highs of ₹1954.
3. HCL Technologies Ltd: HCLTech has posted sales of 101456 Cr in F.Y 2022-23, compared to 85651 Cr in F.Y 2021-22 up 18.45% YOY. Operating profit is also up from 20529 Cr to 22628 Cr, 11.85% up during the same period. The operating margin is slightly lower compared to the previous year’s 24% but acceptable at 22%. The company has also increased its reserves to 64862 Cr from 61371 Cr despite paying dividends worth 12995 Cr. HCLTech has a ROCE of 28.7%. The shares of HCLTech are down around 18.2% from all-time highs of ₹1378.
4. Wipro Ltd: Wipro has posted sales of 90488 Cr in F.Y 2022-23, compared to 79312 Cr in F.Y 2021-22 up 14% YOY. Operating profit is slightly up from 16684 Cr to 16848 Cr, 1% up during the same period. The operating margin is slightly lower compared to the previous year’s 21% and is at 19%. The company has significantly increased its reserves to 76570 Cr from 64307 Cr. The company is coming with a share buyback with an issue size worth 12000 Cr excluding taxes. Wipro has the lowest ROCE among the top four IT giants at 17.7%. The shares of Wipro are down around 48.2% from all-time highs of ₹740.
From the data, we can see that all the four stocks have witnessed corrections from their highs based on the performance of the companies. Infosys have seen a big fall after its average results in the latest quarter. Wipro is the worst-performing stock among the four because of its inability to generate profit growth.
Source of information: www.screener.in
Is it the right time to invest in these stocks?
Over the decades, we have witnessed the large-cap stocks of great businesses falling by more than 50% or more, recovering and breaking past the previous highs. Economic conditions like recession, interest rates, and inflation have a great effect on the stock markets. Current situations with prevailing inflation and high-interest rates might not seem great for stock markets.
If we can put the recency bias aside and take a look at the financial statements of the companies, it is evident that all these companies have strong balance sheets, income statements, and cash flow statements. Wipro seems to be the worst stock among the top four in terms of generating profits, but it was the best-performing stock up after the Covid-19 crash lows until December 2021, up by 350%.
If a large-cap stock like Infosys with a market cap of around 540000 Cr is trading at a 33% discount with positive profit growth compared to the previous year, it is not a bad idea to invest some capital. In the same way, Wipro is down around 50% from all-time highs but the profit is down only 7.16%.
TCS, Infosys, and HCLTech with dividend payout ratios 61.4%, 58.8% and 65.5% respectively have honored their shareholders with dividends worth thousands of crores. TCS paid 41410 Cr as dividends to its shareholders in the F.Y 2022-23.
Except for HCLTech, the other three companies have bought back their shares at least two times in the last four years. Who else would know better than the management of a company whether the shares are overpriced or underpriced? The companies would buy the shares only if they are underpriced in the current market. Unless the company management uses the debt from external sources to finance the buybacks, share buybacks are a good indicator for investing in well-established companies.
Conclusion:
The market analysts were forecasting ₹2300 for Infosys in April 2022 but the stock fell below ₹1200 in April 2023. As per the recent reports price forecast is swinging between ₹1500 and ₹1700 by the various brokerages. No one knows what is going to happen in the next year, for that matter, next month. The market dynamics change accordingly based on the prevailing economic and political situations. There is no pinpoint answer for whether it is the right time to buy a stock, instead ask yourself if it is the right price to buy the stock. As an investor, have a clear definition of your investing style and never try to time the markets. If you are not an active participant, investing in well-established large caps or Index Funds for the long term is the safest choice.
Disclaimer:
I provide the information and my views on the website only to educate new investors and stock market enthusiasts on equity and other market investments. Please consult a SEBI registered financial advisor before making any investments in the stock or commodity markets. In case of any queries, you can contact me on Contact Form.
