Why IT Stocks are Falling

IT stocks have been under pressure over the last few months on the back of a global economic slowdown and rising interest rates.

Over the last month, their performance has worsened. The Nifty IT index has fallen 7% while the Nifty has declined by 4%.

IT stocks Performance- 1 Month

Company	Change (%)
Mphasis	-17.6
Infosys	-11.0
TCS	-8.2
L&T Tech	-7.3
Wipro	-6.8
Tech Mahindra	-3.0

Source: Equitymaster

Stocks of some of the largest IT companies fell by almost 20%.

The IT sector has been on a downward trend, falling 20% in the last one year after a massive surge post the Covid-19 pandemic. Since March 2022, the index has shed 21%.

Troubles have started to mount up for the sector, and IT stocks are once again falling.

Here's why.

#1 BFSI exposure

The US banking, financial, services and insurance (BFSI) sectors are a key revenue segment for top Indian information technology (IT) companies.

The recent banking crisis in the US and Europe is expected to hurt the inflows and growth in these firms.

BFSI exposure, excluding insurance, for TCS stands at 29%, Infosys at 26%, Wipro at 27%. While Europe BFSI exposure for Infosys, and Wipro stood at 4.9%, 11.7 % respectively.

These companies are likely to be impacted if the crisis worsens.

The collapse of these large banking institutions may not only lead to a reduction in existing business but also trigger a reduction in tech spending in the future, along with delayed deal closures.

The top priority for these banks now is to survive the crisis and maintain adequate liquidity and capital adequacy, which will lead to a more cautious approach to spending.

These sharp drops in tech spending may result in a pause or slowdown in the implementation of digital and cloud programs soon which could impact the earnings of these stocks.

#2 FII selling

Data available with depository NSDL suggests that FII selling intensified in the IT sector in the fortnight ended 15 March 2023 with the institution category pulling out Rs 37.8 billion (bn) worth of IT shares against Rs 7.1 bn outflows in the fortnight ended 28 February 2023.

While the outlook on Indian banks has remained resilient amid rising credit growth in a well-regulated environment, the current predicament for the banking and financial services sector in developed markets has thrown a spanner in the works for Indian software exporters.

Already reeling under the pressure of a slowdown, discretionary tech spending is expected to be reduced further in the near term.

What's next?

Going ahead, the future outlook of the IT sector looks cautiously optimistic.

The turmoil has rekindled the fears of a global recession. It is further leading to delays in decision-making in IT contracts. There is also demand contraction in some markets.

Due to this, the growth of the Indian IT sector is expected to slow down to 8.4% to in the financial year 2023.

However, a few tailwinds are working for the industry.

The top 5 companies are seeing strong demand for their services having reported a deal pipeline of US$ 18 billion and a 10% growth in overall client base.

Further, the domestic revenue is set to jump on continued investments by government and local government enterprises.

Attrition, too, has softened to 21.8% as of December 2022 quarter as against 25.7% at the end of the June 2022 quarter.

For more details, see how the stocks in the NIFTY IT are performing today and read our IT sector report.

To dwell deeper on why TCS shares are under pressure , check out our recent editorial why TCS share price is falling.

You can also compare the top IT companies with each other using our compare tool:

Infosys vs TCS

HCL Tech vs Wipro

Tech Mahindra vs LTIMindtree

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

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