Why it makes sense to keep off digital stocks

Investors seem to be shying away from stocks of companies in the ‘digital’ space with most counters that comprise the Nifty India Digital index giving negative returns over the past year.

The index tracks the performance of a portfolio of stocks that broadly represent the ‘digital theme’ within basic industries, such as software, e-commerce, IT-enabled services, industrial electronics, and telecom services.

The fall in some of these stocks over the past year has been steep; the sharpest decline of around 60 per cent was seen in shares of PB Fintech (parent company of Policybazaar).

FSN E-Commerce Ventures (parent company of Nykaa), Tanla Platforms, Mphasis, IndiaMART InterMesh, Tech Mahindra, HCL Tech, Vodafone Idea, Infosys, and IRCTC have been the other prominent losers – they have skidded between 12 per cent and 55 per cent during this period, data shows.

The Nifty Digital index has slipped nearly 19 per cent in one year and underperformed the Nifty50, which has moved up 1.3 per cent during this period.

According to A K Prabhakar, head of research at IDBI Capital, one cannot paint the entire sector with the same brush.

Investment in these stocks after the sharp decline seen over the year, he said, has to be done on a case-by-case basis.

“There have been a number of companies that got listed in the digital space in the past two years.

"Many of these companies were not even making a profit and their valuations were steep.

"From Nykaa, PB Fintech, Paytm, and Naukri to Zomato — a lot of these stocks have corrected heavily.

"At the global level, the tech-heavy Nasdaq, too, has corrected significantly.

"However, one can selectively look at IT and telecom stocks within this space.

"Investment in stocks of new-age companies can still be put off by a year,” Prabhakar advised.

Those at Nomura also remain cautious about the Indian IT sector as they expect a demand slowdown in the months ahead if a recession sets in globally.

“We remain cautious about the India IT services sector, overall.

"We believe investors are likely to be disappointed about revenue growth in 2023-24 (FY24).

"We prefer large-caps to mid-caps in the current environment.

"Our ‘buys’ are Infosys and Tech Mahindra (in large-caps) in that order, and Persistent (in mid-caps).

"Our ‘reduce’ ideas are TCS (in large-caps) and Larsen & Toubro Infotech (in mid-caps),” wrote Abhishek Bhandari and Krish Beriwal of Nomura in a recent report.

That said, in the past 30 trading days, shares of companies — such as Policybazaar, Nykaa, Tata Elxsi, Sonata Software, Vodafone Idea, Naukri, Cyient, Wipro, and Paytm — have slipped between 6 per cent and 18 per cent, NSE data shows.

G Chokkalingam, founder and chief investment officer at Equinomics Research, said structurally, IT companies like Infosys, TCS, Wipro, and Cyient have been growing in poor single digits in dollar terms over the past few years.

It is just valuation contraction on account of a meltdown in technology stocks on the Nasdaq and margin pressure that has led to the meltdown in their stock prices.

These stocks, he said, would make a comeback once the US markets stabilise and the domestic IT industry successfully addresses the issues of employee attrition, recession fears, and recent huge salary payouts.

“Some of the other ‘digital/new-age’ companies debuted at a steep valuation compared to the traditional technology firms.

"The rally fizzled out as they failed to make a decent profit.

"Moreover, their listing was an exit route to venture capitalists who took stakes earlier at throwaway prices.

"These companies would take over two-three years to make a profit, which could make their valuations attractive.

"Retail investors should exit these stocks whenever there is some revival in stock prices,” Chokkalingam said.