Why Infosys, TCS, HCL Tech and Other IT Stocks are Falling

Last week, we wrote about the 5 big underperforming sectors of 2022 and what 2023 could have in store for them.

No surprises there as IT sector stocks and tech stocks topped the chart.

Here's an excerpt of what we wrote:

• The IT sector, one of the strongest sectors in the country, is now under pressure due to recent global crisis and fears of a recession.
  
  So far this year, the Nasdaq Composite index, which has the big tech stocks like Amazon, Tesla, Google, among others, has slipped by more than 28%.
  
  Indian IT stocks are also facing high attrition as employees are leaving in large numbers for better opportunities.
  
  In the final quarter of financial year 2021-22, most Indian IT companies reported an employee attrition rate of more than 20%.

If you follow the markets closely, or even have friends or colleagues who track the markets, chances are they would tell you how their holdings in IT and tech stocks have collapsed.

Who would have thought that bluechip stocks like Tech Mahindra, Wipro, among others would face a correction ranging 30-50%?

As things stand now, IT stocks are once again on the verge of becoming talk of the town. This time again for similar reasons.

Troubles have started to mount up for the sector and IT stocks have once again started to fall.

Let's understand why IT stocks are falling first.

Why IT Stocks are Falling

#1 Macro concerns are here to stay

Last week on Thursday, India's third largest IT company HCL Technologies said it may clock annual revenue growth at the lower end of its guided range.

This on the back of macro-economic challenges in the demand environment.

The IT major's chief executive was of the view that furloughs and drop in discretionary spend in tech, telecom and other verticals are a little bit more than what the company expected at the beginning of the quarter.

As soon as HCL Tech warned investors of potential growth concerns and pricing pressures, the stock saw a steep correction of 7% on an intraday basis.

According to reports, investors were so worried that around 12.4 million (m) shares exchanged hands on the bourses the very next day compared to an average daily volume of about 2.8 m shares.

#2 Global recession concerns still here

Apart from attrition, the main reason why IT stocks were falling was due to global recession concerns.

IT companies have large exposure to US and European nations. While India has so far managed to buck the trend, economists fear that a recession could occur in 2023, particularly if the Fed's interest rate hikes stifle demand from individuals and businesses, or if its inflation strategy fails.

There's still uncertainty on US Fed's monetary policy tightening.

No wonder 'recession' is perhaps the most widely used term in global financial markets these days.

#3 Brokerages cite valuation concerns

Another reason why IT stocks have continued their downtrend in recent days is because global brokerages have voiced valuation concerns after HCL Tech's sad commentary.

Credit Suisse in a note warned of further correction in valuations in case the US macroeconomic scenario weakens.

Their analysis of six large correction cycles for the Indian IT sector suggest that barring a huge sudden macro event such as the global financial crisis and Covid-19 pandemic, stock correction is driven mainly by valuation and not earnings per share (EPS). They added IT valuations are stretched by every measure, and that will drive a correction in these stocks if the US macro weakens.

Meanwhile, Japanese brokerage house Nomura said that tech budgets are linked to revenue growth of enterprises, indicating further slowdown in demand in the coming quarters.

Adding to this, Morgan Stanley said that the negative macro commentary could possibly become an Indian IT sector-wide issue.

Equitymaster's view on IT stocks

We reached out to Tanushree Banerjee, Co-head of Research at Equitymaster, on what she has to say about the current scenario for IT stocks.

Here's Tanushree:

• The commentary by HCL Tech's management that the December quarter will see higher-than-expected furloughs was particularly pertaining to near term concerns about the BFSI segment and certain hi-tech areas.
  
  The trend of lower earnings for a few quarters could be expected across the Indian IT sector.
  
  Investors considering the best businesses in the sector should take advantage of value buying opportunities that may arise.

How Indian IT stocks have performed recently

IT stocks fell like a pack of cards on Thursday last week when HCL Tech first reported macro worries.

The correction spilled over to the next two trading sessions, and IT stocks fell more.

The BSE IT index and Nifty IT index have fallen over 3.5% in a span of three days.

Today again, both the indices were down half a percent in preopening sessions. At present, they are trading on a flat note.

Here's a table showing recent performance of Indian IT stocks.

		Change (%)
Company	CMP (Rs)	5 Days	December so far	2022 so far
Tech Mahindra Ltd.	1,032	-3%	-5%	-34%
LTIMindtree Ltd.	4,331	-7%	-9%	-22%
Infosys Ltd.	1,547	-4%	-7%	-18%
Coforge Ltd.	3,908	-6%	-7%	-31%
Mphasis Ltd.	1,999	-8%	-14%	-41%
HCL Technologies Ltd.	1,028	-3%	-6%	-41%
Wipro Ltd.	396	0%	-6%	-17%
Tata Consultancy Services Ltd.	3,285	-3%	-5%	-12%
L&T Technology Services Ltd.	3,884	-4%	-6%	-42%
Persistent Systems Ltd.	4,051	-3%	-4%	-45%

Source: Equitymaster

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

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

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...