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 and 26 percent in 2022 year-to-date (YTD). In comparison, the benchmark Nifty is flat in the last 1 year and up around 4 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 as the companies reported their September quarter earnings.
In the last 1 year, all Nifty IT constituents, except HCL Tech (-9 percent) and TCS (-8 percent) reported a double-digit fall. Mphasis tanked the most, down 42 percent, followed by Wipro, Tech Mahindra and Coforge, down over 30 percent each. Meanwhile, Infosys shed 13 percent.
And according to experts, the performance of the IT space is not likely to improve anytime soon. In a recent report, domestic brokerage house ICICI Securities noted that it still believes that deployment in the sector should be slow and gradual in nature as there would be unknown risks ahead that might further degrade valuations. It also expects that there might be further consolidation in IT stocks until there is clarity on CY23 IT budgets.
As per ICICI, the macroeconomic challenges have worsened in the last three months as 1) IMF trimmed the US GDP growth forecast and raised jobless estimates for CY22 and CY23 in its July 22 outlook, and 2) record high energy price inflation and forex weakness persists in Europe, UK, etc.
It further noted that the impact of the macro weakness on the technology sector is visible - 1) SaaS players are experiencing elongation in deal cycles, 2) reduction in revenue guidance by some SaaS companies, 3) weakness in verticals such as mortgage, capital markets and retail for IT services, and finally, 4) slowing hiring in IT services.
Other experts also recommended that investors buy Indian IT stocks in tranches and accumulate more on dips.
Nirvi Ashar, Manager, Fundamental Research, Religare Broking 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.
Meanwhile, according to Vaibhav Agarwal, small case manager & Head of Research, Basant Maheshwari Wealth Advisers LLP, people are piling on to the short-term bad news and ignoring the long-term trajectory of the business model.
"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.