Should You Buy Stocks of IT Companies now?

Q1 results of Infosys and TCS are out and both the companies have published contrasting results that create confusion in one's mind. Results of both the companies are generally benchmarked for entire IT industry and these recent results do not clarify situation of IT industry at all this time! What should you do at this time? Buy stocks of IT companies or not?

Infosys stock is dragging in red while TCS is up in green. Sheer contradiction by two biggest IT supremos of India creating state of confusion in small investor's mind.

US dollar income of Infosys has declined by 1.1% compared to previous quarter earnings. Also, achieving growth in the US dollar revenues for company could be difficult, especially when major corporations across Europe and US are reducing IT expenditures and so the number of projects that IT companies in India receive from them are decreasing. Also, Infosys has stopped providing quarterly guidance that will make guesswork more difficult for stock market analysts.

I was reading an article that explains how the IT industry is facing reduction in number of projects from their clients. Since the number of projects coming to companies are reducing constantly from bleak economies of Europe and US, the employees that IT companies had recruited are becoming overhead expenses for them. Normally, IT companies would recruit more employees than what they need, in anticipation of future flow of projects. It is called bench strength. Number of projects are not flowing in as they use to be in past few years but IT companies have to pay salaries and benefits to their bench strength without earning any revenues using their services. And looking at Europe and US, the trend seems to be continuing for next few quarters at least. You can read the article here.

Near future will certainly be difficult for most of the IT companies in India as they are dependent on Europe and US for major chunk of their revenues. Their first target will be to sustain the current levels of their revenues and then think of growth. From stock market's perspective, it tells you that these are the companies which may sustain but growing from here? Could be extremely difficult. And when there is no growth anticipated in near future, the stock remains range bound (call it dud) on bourses or it even declines.

In my opinion, stay away from IT sector stocks unless the economic scenario of Europe and US improves (which may take years!!), do not buy stocks of IT companies for now.