IT has been the worst performer so far in 2022, with the Nifty IT index losing around 31% of its value versus Nifty’s loss of 2% over the period. However, when the Nifty eroded around 1.8% of its value on Monday, the index was the only silver lining in a sea of red.
Analysts have warned that the economic slowdown and impending recession in the US and Europe will hit the margins of Indian software exporters hard. But the sharp depreciation of the rupee is now acting as a tailwind for the sector.
IT majors like TCS, Infosys, HCL Technologies, Wipro, Tech Mahindra and Mindtree which earn the bulk of their revenue in dollars are expected to benefit from a weaker rupee. The national currency hit a record low of 81.65 on Monday against the safe haven dollar.
Analysts believe that the price mainly reflects the global recession and that IT stocks are now trading at reasonable valuations.
Year-to-date (YTD), Wipro, Coforge and Tech Mahindra are down around 42-45%. TCS lost about 20% of its market value, Infosys and HCL 27% and 31%, respectively.
Hiren Ved, CEO of Alchemy Capital Management, said IT stocks underperformed on fears of lower tech spending due to the recession in developed markets like the US and EU. “As long as the multi-year cycle of increased outsourcing and increased spending in specialist IT services companies remains intact, we will continue to invest in IT,” he said.
The current momentum in IT stocks, however, may prove short-lived for those exploiting the sector to make a quick buck, even if long-term growth remains intact.
Sandeep Bhardwaj, CEO of IIFL Securities, said a slowdown or recession would negatively affect Indian exports as demand for goods and services would start to dry up. “Therefore, in the medium term, we should expect higher volatility in IT stocks,” he said.
Global brokerage Jefferies said Accenture’s quarterly revenue growth of 22% year-on-year suggests strong growth for Indian IT companies in the second quarter. “Its F23 organic growth forecast of 5.5-8.5% YoY is below our 14%/8% YoY growth expectation for Indian IT companies for F23/ 24th, which could pose a risk to our FY24 estimates. With sector valuations still at a 10% premium to 10-year average levels, we remain selective, with Infosys our only pick in the sector” , did he declare.
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