Information-technology stocks were routed on Thursday, amidst fears of a looming recession. The rupee’s sharp fall, too, could not cushion the sharp correction in tech stocks on Thursday, as investors safeguarded themselves. A recession could lead to decline in IT spending and it is for this reason that investors started dumping these defensive stocks. What added fuel to the fire was a report by JP Morgan, which downgraded the entire sector citing deterioration in earnings outlook.
Software stocks, from drivers of market rally last year, have turned laggards this year with the sector underperforming the benchmark Nifty50 by 17.8% year-to-date. Infosys, the highest contributor to Nifty50 with 566 points last year, has corrected more than 26% from its January highs. Moreover, the gauge for IT stocks — Nifty IT Index — has corrected almost 28% since January 4, against 14.4% fall clocked by the benchmark Nifty50 from its October peak. The fall in IT stocks has wiped out
8.96 trillion worth of market capitalisation with TCS and Infosys witnessing erosions to the tune of2.4 trillion and Rs 1.9 trillion, respectively. The two IT giants along with HCL Technologies, Wipro and Tech Mahindra had bolstered about a third to the Nifty50, which gained 24.1% in 2021.
JP Morgan, which downgraded the IT sector and cut the target multiples by 10% to 20%, believes peak revenue growth is behind the sector and EBIT margins would start trending down from inflation, mean reversion. The IT sector, which was accelerating till Q3FY22, has begun to slow down from Q4FY22, which is likely to worsen into FY23 due to competition, supply issues and eventually a worsening macro. “We expect margin headwinds to drive downgrades in Q1/Q2 earnings seasons, and macro-led revenue downgrades in Q3/Q4, that make even current multiples unsustainable for some,” observed JP Morgan.
IT stocks dragged the benchmark Nifty on Thursday with Wipro sinking as much as 6.3%. Others like HCL Technologies, Infosys, Tech Mahindra and Tata Consultancy Services (TCS) also followed suit with each falling anywhere between 5% and 6%.
According to Kotak Institutional Equites, correction in IT stocks have been driven by rising interest rates, recession worries and risk to margins. While concerns on margin are adequately priced into stock price, the economic recession — which has direct impact on demand and bearing on multiples — is not priced. “We expect IT spending intensity to increase but growth in spending is a function of client health and economic environment,” wrote KIE in an investor note. The rupee lost another 14 paise on Thursday to hit a new low of 77.73 against the US dollar, tracking weakness in equity market and persistent foreign fund outflows.