IT stocks bleed mirroring Nasdaq plunge; Nifty IT index down 3.4%

Information technology (IT) stocks plunged on Wednesday, mirroring a slide in the tech-heavy Nasdaq Composite of the US a day earlier after hotter-than-expected inflation data triggered risk-off bets.

The Nifty IT index fell 3.4 per cent, with all its 10 components ending with losses. A downgrade by Goldman Sachs also dampened sentiment towards tech stocks, which have been reeling from selling pressure this year.

On a year-to-date basis, the index is down 27.3 per cent, even as the Nifty50 index is up close to 4 per cent. The sharp underperformance is because of concerns that companies might scale back their IT budgets amid an uncertain global growth outlook.

On Tuesday, the Nasdaq sank 5.5 per cent in its biggest single-day fall since March 2020. Also, all 100 stocks that make up the index fell for the first time in 30 months. However, the index was up about 0.9 per cent as of 20:40 IST on Wednesday.

“IT stocks will move to the narrative of whether the US has a soft landing or a deep recession. So it may be an uncertain and volatile outlook for these companies. Large Indian IT companies, though, are trading at attractive dividend yields of 4-5 per cent,” said Rajesh Bhatia, managing director and chief investment officer, ITI Long Short Equity Fund.

Last week, the Nifty IT index tried to stage a comeback, rising 4 per cent while the Nifty gained only 1.7 per cent. However, the latest downgrade by Goldman Sachs has come as a setback for the sector.

The influential brokerage cut the price targets for large software exporters Tata Consultancy Services and Infosys to Rs 2,611 and Rs 1,244, respectively, suggesting sharp downsides from current levels, Bloomberg reported. Shares of TCS fell 3.4 per cent to end at Rs 3,121 on Wednesday, while Infosys dropped 4.5 per cent to close at Rs 1,475. If not for the IT pack, the Indian markets would have finished higher for a fifth day in a row.

In August, foreign portfolio investors (FPIs) pumped in $6.4 billion into the domestic markets. However, IT stocks received only a trickle at $50 million — and it was only the first positive month of inflow for the sector after a year. Over the past one year, FPIs have sold IT shares worth nearly $11 billion, with sectoral allocation to tech stocks falling to its lowest level since March 2018.

In recent months, most global brokerages have been sounding caution over the IT sector. In August, JP Morgan downgraded all its ‘overweight’ stocks in the IT sector to ‘neutral’ and maintained its ‘underweight’ position in the sector.

“Sharp margin misses across scale IT services vendors in the June quarter were deeper than feared with incremental growth coming at lower margins. We expect the margin erosion to persist in the medium term and stay meaningfully below long-term trends due to reversal in employee-employer bargaining power, underwhelming graduate uptake, limited price increases, return in travel/facility costs and high onsite inflation,” the brokerage said in a note.

“Despite underperforming the Nifty in H1CY22 by a huge 19 per cent, the NSE IT has continued to underperform the Nifty in July by 4 per cent and in August by 6 per cent, yet IT stocks trade at 1 standard deviation above their 10-year averages, offering limited valuation comfort. We expect further cuts to FY23/24 EPS estimates, resulting in their continued underperformance, and hence reiterate our cautious stance on the IT sector with Infosys our sole BUY,” Jefferies had said in another note.