Why IT Stocks are Falling

Indian IT stocks are back in the news...and not for positive reasons.

The BSE IT index was down 2% intraday today amid negative sentiment.

Do long-term investors need to be worried? Or is it a short-term blip?

And what's the outlook for the IT sector now?

Let's find out...

BSE IT Index - 1 Year

#1 Trump's Warning

US President Donald Trump has warned that the US may increase sanctions on India over the issue of Russian oil imports.

Trump was quoted as saying, "We could raise tariffs on India if they don't help on the Russian oil issue".

The US has already raised tariffs on Indian imports to 50% over the Russian oil imports issue and it was unclear if Trump meant a further hike in tariffs, by how much, and when.

The two countries have been in trade negotiations over a major trade deal for months now and there is still no assurance of its finalisation. The media have reported that major progress had been made and there have been rumours of the deal being signed by March this year.

However, there is no confirmation on this important point.

Also, it's unclear if the US President's latest statement is just a threat to be used as a negotiating tactic or if he is really serious about raising the tariffs on India.

As Indian IT companies mainly derive revenue from the US, this warning has impacted sentiment.

#2 H1B Visa Issue

India has flagged its concerns to the US about Indian professionals facing significant delays and cancellations in pre-scheduled processes in H1B applications.

The speculation is that the enhanced vetting process being employed is causing disruptions and could be a deliberate action on the part of the US to deny visas.

The U.S. Embassy in India issued a warning on Tuesday about criminal penalties if immigrants broke US law. The timing of this warning when taken along with Trump's statement on tariffs has delivered a blow to investor sentiment.

Indian IT companies have spent many years, since Donald Trump's first Presidency, reducing their dependence on the H1B visa.

However, the recent decision by the US government to impose a few of US$ 100,000 on all new Visa applications will have a negative impact on these companies from a service delivery standpoint and more importantly, on their margins.

Thus, in the long term, Indian IT companies will have to adapt to this new reality and find ways to boost revenue growth.

#3 Growth Concerns

Long-term investors are concerned that the revenue growth of Indian IT companies will be affected by the rise of AI.

The ever increasing uses of AI is directly tied to the slowdown in technology spending in the western world. Partly this is explained by macro factors but the widespread use of AI is also playing its part.

Across industries, clients of Indian IT companies are shifting their focus from relatively simple AI use cases to more complex AI applications to justify their return on investment.

Indian IT companies have invested considerable time and money to get the entire workforce AI ready so as to be prepared for this disruption. The industry's future revenue growth will depend a lot on how it fulfils the demand for AI-related services in the face of intense competition.

Conclusion

Investors considering IT stocks should ideally broaden their horizons. Consider technology stocks as a whole, instead of limiting one's options to just software.

Technology stocks are not just limited to the IT industry but encompass many other new technology company stocks. Many other industries make up the technology space and companies are sprouting up in defence technology, semiconductors, and sustainable technology.

These are also newer fields like cybersecurity, AI, and IoT as well. Technology applications are almost limitless and expanding into different areas.

Thus, keeping an open mind and digging deep into the ecosystem will likely result in more opportunities for an enterprising investor.

Investors should evaluate the company's fundamentals, corporate governance, and valuations of the stock as key factors when conducting due diligence before making investment decisions.

For more details, check out our IT sector report.

Also, check out Equitymaster's stock screener to find the best Artificial Intelligence stocks in India and the top Internet of Things (IoT) stocks in India.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...