After a brief rally, Indian IT stocks declined on Tuesday. The shares fell up to 5 per cent with Persistent Systems (-5.13 per cent), Mphasis (-3.94 per cent), and Coforge (-3.60 per cent) being the top losers. Index heavyweights Tata Consultancy Services (TCS), Infosys, Wipro, and HCL Technologies fell more than 1 per cent.
The Nifty IT index was down by two per cent. The index opened at 29,003.50 against the previous close of 29,238.75 but soon fell to the level of 28,662.65.
The index, after a healthy gain of about six per cent last month, has been witnessing profit booking in June so far as investors fear that even if the Fed takes a pause in the June policy meeting, rates may be hiked later as the US jobs market remains tight and inflation remains elevated. This will hit the growth prospects of the US which is a crucial market for Indian IT companies.
Moreover, a fresh wave of the selloff could be attributed to the updates by leading American IT company EPAM Systems which announced the reduction of its second quarter and full year 2023 financial outlook. As per a Yahoo Finance report, EPAM Systems, Inc., leading digital transformation services and product engineering company, today announced it is reducing its second quarter and full year 2023 financial outlook due to further deterioration in the near-term demand environment.
IT stocks have underperformed the Nifty50 by a margin over a 12-month period. The Nifty IT index has declined 4.6 per cent during this period as against a 12 per cent (+1,974 points) return given by the 50-stock index, according to Trendlyne data.
What Should Investors Do Now?
Stock market experts are of the opinion that RBI keeping interest rate unchanged would attract foreign investors as global market has already discounted 25 bps expected US Fed rate hike in upcoming GOMC meeting. They advised long term positional investors to start accumulating IT stocks for long term as quality IT stocks are available at highly discounted price. However, they predicted that fresh rally in Indian IT stocks would start from the large-cap segment followed by mid-cap and small-cap IT stocks.
Expecting status quo from RBI policy meeting, Vaibhav Kaushik, Research Analyst at GCL Broking said, “As Indian economy is in sound condition and most of the indicators are signaling strong numbers, I strongly believe that RBI may announce rate-pause in its RBI MPC meeting. If this happens, then in that case we may expect fresh leg of rally in Indian stock market. To maximise one’s return, it is advisable to look at stock available at discounted price and for that one can look at IT segment as potential multibagger can emerge from this segment.”
Vaibhav Kaushik of GCL Broking said, “One should look at Birla Soft in small-cap segment whereas TCS and LTIMindtree shares can be a good long term option in large-cap IT segment.” However, he said that HCL Tech and Infosys shares may also give better returns in long term as these shares announce buyback and bonus shares at regular intervals.
Delays in client decision-making and pullbacks in discretionary spending have implications for the growth of Indian IT. Kotak expects revenues in Q1FY24E to be weaker than Q4FY23 across companies in its coverage universe.
The demand environment is especially weak in the financial services and technology segments.
Kotak expressed its shock over the rally in stock prices of IT companies, despite a weak demand scenario coupled with a prolonged recovery in clients’ willingness to spend.
We believe that upsides do exist in Infosys and HCL Technologies but are wary of other names.
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