TCS Infosys and Wipro lose investors; here’s why

Largecap IT companies have all of it - big balance sheets, strong cash flows, even strong dividend-paying capabilities. Despite these, investors are bailing out on them. The IT industry's sentiments remain weak on the dreary demand environment, which is expected to only pick up in the second half of fiscal 2024. Companies are concentrating on cost efficiency, with companies cutting back on non-critical projects, and weak global macroeconomic conditions are expected to create pressure on the topline of these firms. TCS Infosys and Wipro have left investors gasping for returns, amidst the burgeoning tide of tech snobs. Infosys is down 11%, Wipro 1%, while TCS has risen just 1%. Tech Mahindra HCL Tech and MindTree have managed to increase between 11 -19%, but interestingly, their upside seems dwarfed in front of high double-digits to multibagger returns offered by some Tier 2 IT companies. Zen Technologies and Datamatics Global Services, among other small-cap IT stocks, have turned multibaggers so far this year. On the top end of the IT industry, Persistent Systems Oracle Financial Services Software and Tata Elxsi, both of the top IT companies, have also gained more than 20 percent. Investors are increasingly gravitating towards smaller-sized deals, hopes of consolidation, and a smaller base of Tier 2 IT firms. IT companies are now not onlyaddressing the needs of CIOs, F&A, and HR functions, but decision-making has now moved to different business units at the client s end, increasing market opportunities. Deal sizes are becoming smaller, allowing mid-sized IT companies to participate. The deal now makes up only 20% of ACV compared to 40% two years ago. Tier 2 IT companies have advanced niche domain expertise and expertise in new growth areas, enabling them to win mid-sized deals based on the value they provide. This trend of outperformance of mid-sized peers over Tier 1 peers is likely to sustain, said analysts at ISG. Large corporations are driving the industry because they have a very high revenue base. The companies account for 60 - 80% of the overall industry. If the industry is expanding at 4%, these 4 - 5 companies collectively cannot grow significantly above 4%. However, some small and midcaps don't have issues like larger players, such as a higher base. It's not that all companies with smaller bases can grow to double-digits, but naturally, having a small base is an advantage. In that sense, faster growth isn't that difficult. And hence, the market has rewarded these smaller players, said G Chokkalingam, founder of Equinomics. The market could be experiencing more consolidation, which could be fueling the share prices of smaller firms. Large companies are growing in low single digits, and they are sitting on huge cash. And there is hope among investors that some deals can happen in the smaller IT players, Chokkalingam said. Analysts are generally preferring Tier 1 IT companies over Tier 2 and believe it might be time to book profits in the latter. We continue to prefer Tier-I players over their Tier-II counterparts, given the former s attractive valuations, increased traction in vendor consolidation, and diversified client portfolios, said analysts at Motilal Oswal Financial Services. Chokkalingam also urged investors to book profits in the second-rung IT stocks. I am negative of these companies. I think most of them have risen too much, and it might be time to book profits, he told ETMarkets. Girish Sodhi, a head of Swastika Investments, believes that midcap IT companies can continue to outperform. He says the IT industry will face some challenges over the next 2 - 3 quarters. Things should normalise for the IT sector as a whole after that, he said. IT companies are implementing cost-cutting measures. They are focused on dealing with the next set of challenges, he said.