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Why IT Stocks Are Rising

Jun 4, 2022

Why IT Stocks Are Rising

The BSE IT (information technology) index has changed its tread substantially in the last two years.

IT stocks have remained a favourite with investors for a long time now. The upward trend set into motion after the pandemic, didn't end until earlier this year.

However, this changed since the beginning of 2022. The BSE IT index started to fall in January 2022, primarily triggered by the change in the NASDAQ composite.

The Nasdaq Composite index is the tech-heavy American stock index that holds tech giants like Alphabet, Amazon, Microsoft, Tesla etc. The Indian IT stocks mirror the Nasdaq index. Where the Nasdaq index goes, the Indian IT stocks tend to follow.

The world's largest technology companies witnessed a widespread sell-off, beating down the NASDAQ index. The Indian IT stocks followed suit, falling precipitously, and wiping much of the rapid gains stocks enjoyed off their pandemic lows in March 2020.

Worries over macro headwinds like steep inflation, the US Federal Reserve's attempts to contain prices by raising rates, and globally high attrition rates, bogged down the IT stock's performance.

Moreover, the Q4 results of most of the Indian IT Stocks did not meet expectations.

While the NASDAQ lost 22.2% since the beginning of the year, the BSE IT index lost 19.2%, touching its 52-week low.

chart

The Indian tech giants like TCS and Infosys fell by 9% and 19% respectively, and Tech Mahindra and Wipro fell by 35% and 33% respectively.

While Infosys reported depressed margins due to a temporary effect, TCS results were below expectations in the quarter ending March 2022 results. The company reported stable revenue growth but declining margins driven by a hike in employee costs led by higher attrition levels.

Tech Mahindra maintained the growth momentum in its revenue but reported lower margins due to an amortisation cost from recent acquisitions.

In the past few days the NASDAQ and the BSE IT Index have changed course. They're up by more than 10% from their 52-week low, the IT stocks seem to be gaining back their glory.

But what has changed?

The Indian IT companies are no longer glorified staff fillers. They are full-fledged technology giants covering a wide array of sectors.

The demand profile has changed structurally with the advent of digital technology services like cloud computing and IoT (Internet of things). Therefore, there is a good chance they won't be the first ones to get hit when the recession looms in.

The Banking and Financial (BFSI) segment, the largest among the top Indian IT companies, is exhibiting signs of relentless demand. This boost will bode well for the top IT companies in the country.

Another reason for the jump is the Infosys guidance. The company said the demand outlook is strong despite potential macro headwinds. The company believes its clients remain focused on large transformational programs reporting their deal pipeline is robust.

They also said that the growing digital services business will serve as the base to deliver business value and support operating margins. For instance, their clients in the retail segment are accelerating their e-commerce spending despite a fairly weak demand outlook

All factors combined have boosted investor sentiment, restoring confidence in the IT sector's performance. Also, since the fall, the stocks are available at attractive valuations, offering a large margin of safety to investors.

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