Why IT Stocks are Falling

The Indian IT sector is facing a significant downturn, leaving investors puzzled. Key players such as Tata Consultancy Services (TCS), Infosys, and Wipro are experiencing a wave of selling pressure.

Look at how much the stocks of these top Indian IT companies have fallen by over the last week.

Coforge Ltd.	-9.00%
Infosys Ltd.	-7.00%
Tata Consultancy Services Ltd.	-6.90%
HCL Technologies Ltd.	-5.50%
Wipro Ltd.	-5.40%
Persistent Systems Ltd.	-4.70%
Mphasis Ltd.	-3.60%
LTIMindTree Ltd.	-2.50%
L&T Technology Services Ltd.	-1.10%
Tech Mahindra Ltd.	-0.90%

Source: Ace Equity

While the long-term outlook for Indian IT remains optimistic, a confluence of recent events has instilled a sense of caution.

Understanding the reasons behind this downturn requires a deep dive into various factors, from global events to industry changes.

Let's find out what is causing the decline.

#1 Weak Business Outlook by Accenture Leads Downslide

Shares of IT heavyweights Infosys, HCL Tech, Wipro, and TCS fell between 3-5% today after Accenture, a key peer of Indian IT services companies, reduced its FY24 revenue guidance to 1-3% YoY on delayed decision making and weak discretionary spends.

The impact was felt across all major IT stocks with the Nifty IT index falling 3%. The technology index has corrected nearly 9% in the last one month due to muted guidance provided by some of the global services peers for 2024.

Accenture's results and outlook have reaffirmed the market's expectations of cautious near-term demand.

The company reported reported flat revenue growth for the quarter (February-ending quarter), at the midpoint of -2 to +2% growth guidance range.

Growth was led by managed services, which grew 3%, while consulting declined 3%. Key verticals of CMT and financial services declined 7% and 6%, while health and public services and resources grew 10% and 4%.

Accenture noted that, while the long-term technology spending trends remain intact, client cautiousness due to macro uncertainties is weighing on tech spending in the near term; clients continue to prioritise cost take-out projects as discretionary spends remain weak.

The company also lowered its guidance to 15.5% from 15.5-15.7% for FY24, implying 10% YoY improvement.

#2 Fed's Decision on Interest Rates

Prior to the announcement of Accenture's results, shares of IT companies were already under pressure as investors awaited the Fed's decision on interest rates.

The sector's sentiment remained sour ahead of the Federal Reserve's rate decision, with widespread expectations that the US central bank will maintain interest rates at their current level.

Equity benchmarks Sensex and Nifty 50 were down by nearly 1% on 19 March 2024 amid selloff in the mid-cap and small-cap segments. Selling was seen across all sectors with Nifty IT leading the losses amongst the sectoral indices.

TCS led the slide falling 4.2%, following the announcement of Tata Sons' plan to sell stake worth over Rs 90 bn at a 3.7% discount.

However, the sentiment reversed post the outcome of the Fed's meeting on 19-20 March 2024.

The Fed announced that it would keep interest rates steady. It also revised the economic forecast, upgrading the US growth outlook for this year to 2.1%, up from 1.4% forecasted in December.

Markets considered this a positive and Indian IT companies, which have a significant reliance on US markets saw gains.

Conclusion

The current downtrend experienced by Indian IT stocks is not a singular occurrence but rather a culmination of various challenges.

Geopolitical tensions, exacerbated by global uncertainties, have exerted immense pressure on these companies.

However, amid this turbulence, there exists a silver lining. Companies can leverage this period to reassess their business models, fortify their capabilities in emerging technologies, and diversify their revenue streams.

For investors, navigating through these tumultuous times requires a keen understanding of the underlying dynamics at play. By staying informed and discerning, one can identify value amidst volatility and capitalize on opportunities that arise.

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...