Untill the beginning of the month, the year to date fall in the BSE IT index was around 8%, quite the same percentage of the appreciating rupee in the same period. And now when the rupee has started depreciating, IT stocks continue to fall. August has seen as seen a near 4% drop in the BSE IT index. This time, analysts reckon, it is the impact of the sub-prime mortgages on slowing down of the financial services sector and the US economy on the whole.
?The indirect impact of sub-prime will be felt by exporting industries and surely by IT companies, ?says Dhruva Chatterji, research manager with Lipper, the world?s leading fund research and analysis organisation. ?We are closely watching the IT sector for further developments and another sell-off may be around the corner,? says a fund manager not wanting to be named.
IT spending in the US market, that contributes to around 50 to 80% of Indian IT companies, is set to witness a slowdown as a result of the sub-prime mortgage fallout. The banking, financial services and insurance (BFSI) sector, which is directly involved in sub-prime lending and indirectly to hedge funds with exposure, are likely to take a hit. Around 24% to 43% of revenues of large Indian IT companies are dependent on the BFSI sector.
Then there are concerns over the overall slowing down of the US economy, the largest client for Indian IT companies. A report by CLSA Capital Markets indicates that both financial services and real estate have contributed around 20% to the US GDP growth in the past three years. And both will be hit by the sub-prime imbroglio.