Fears of recession in major economies and aggressive monetary policy measures to stabalise inflation have dissipated the excitement around the IT space. After performing superbly post the COVID pandemic, the sector has been in a slump in the last 1 year.
The Nifty IT index has lost over 20 percent in the last 1 year. The fall is even larger in 2022 year-to-date (YTD), where the IT index has cracked 27 percent.
In comparison, the benchmark Nifty is down 5 percent in the last 1 year and up 1 percent in 2022 YTD.
All the constituents of the index have also been in the red in the past 1 year as well as in 2022, however, some recovery has been seen in the last 1 month with the start of the September quarter earnings season.
The September quarter performance of Infosys Ltd, Tata Consultancy Services Ltd (TCS) and HCL Technologies Ltd beat a majority of analyst expectations. As per experts, constant currency growth remained strong, even as the impact of cross-currency headwind continues. Deal wins and order flows also remained healthy, improving the outlook for companies in the second half of FY23 amid recession concerns, they added. another positive for the IT firms going ahead is that there have not been any earnings downgrades post the September quarter earnings.
But, let's first understand why this massive correction in the IT space happened.
According to Nirvi Ashar, Manager, Fundamental Research, Religare Broking, the unexpected rise in demand during Covid, rising employee costs and attrition levels impacted margins. So moderating demand and high-cost concerns led to the correction of IT stocks.
Vinit Bolinjkar, Head of Research, Ventura Securities believes that the Indian IT space will continue to underperform due to recessionary pressure in developed markets of the US & Europe and wage inflation.
"During CY20-21, global corporates increased their spending on IT infrastructure to maintain seamless connectivity in a work-from-home environment. This sharply improved the IT orders for the Indian IT companies and they predicted it as a decadal growth opportunity and doubled their headcounts. However, with the easing of pandemic-led restrictions, order flow growth started sliding and it may not increase in line with the employee cost of the IT companies. Besides, wage inflation in developed countries could lead to higher employee costs and impact the operating margins of Indian IT companies," explained Bolinjkar.
Fears of recession in major economies and aggressive monetary policy measures to stabalise inflation have dissipated the excitement around the IT space. After performing superbly post the COVID pandemic, the sector has been in a slump in the last 1 year.
The Nifty IT index has lost over 20 percent in the last 1 year. The fall is even larger in 2022 year-to-date (YTD), where the IT index has cracked 27 percent.
In comparison, the benchmark Nifty is down 5 percent in the last 1 year and up 1 percent in 2022 YTD.
All the constituents of the index have also been in the red in the past 1 year as well as in 2022, however, some recovery has been seen in the last 1 month with the start of the September quarter earnings season.
The September quarter performance of Infosys Ltd, Tata Consultancy Services Ltd (TCS) and HCL Technologies Ltd beat a majority of analyst expectations. As per experts, constant currency growth remained strong, even as the impact of cross-currency headwind continues. Deal wins and order flows also remained healthy, improving the outlook for companies in the second half of FY23 amid recession concerns, they added. another positive for the IT firms going ahead is that there have not been any earnings downgrades post the September quarter earnings.
But, let's first understand why this massive correction in the IT space happened.
According to Nirvi Ashar, Manager, Fundamental Research, Religare Broking, the unexpected rise in demand during Covid, rising employee costs and attrition levels impacted margins. So moderating demand and high-cost concerns led to the correction of IT stocks.
Vinit Bolinjkar, Head of Research, Ventura Securities believes that the Indian IT space will continue to underperform due to recessionary pressure in developed markets of the US & Europe and wage inflation.
"During CY20-21, global corporates increased their spending on IT infrastructure to maintain seamless connectivity in a work-from-home environment. This sharply improved the IT orders for the Indian IT companies and they predicted it as a decadal growth opportunity and doubled their headcounts. However, with the easing of pandemic-led restrictions, order flow growth started sliding and it may not increase in line with the employee cost of the IT companies. Besides, wage inflation in developed countries could lead to higher employee costs and impact the operating margins of Indian IT companies," explained Bolinjkar.
Vaibhav Agarwal, small case manager & Head of Research, Basant Maheshwari Wealth Advisers LLP also noted that fears of a recession in the US and UK would reduce tech spending and would impact the business of Indian IT services. Also, there were supply-side challenges and very high attrition due to a sharp demand revival post covid which caused pressure on margins.
However, we have seen that demand has been strong as enterprises are spending heavily on tech to both transform their business model and optimize costs, he added.
Now, should investors shun the space or look at this as an opportunity to accumulate IT stocks at cheaper valuations?
Bolinjkar recommended that investors buy Indian IT stocks in tranches and accumulate more on dips.
Ashar also advised investors to utilize this correction as a strong buying opportunity in large-cap IT names as the downside seems limited and valuations are not expensive.
According to Agarwal, people are piling on to the short-term bad news and ignoring the long-term trajectory of the business model. If the US remains an innovation hub Indian IT companies will have no shortage of work, he pointed out.
"The current situation is that while the demand remains resilient and attrition is coming down, most IT stocks have corrected 40-50 percent from their peak. Large companies like Infosys are announcing buybacks. With the dollar expected to appreciate as interest rates in the US go up, there is a further tailwind to earnings. Midcap IT companies which are specialising in particular segments where they have a niche or expertise should do better than larger cap IT companies," he said.