Nifty IT slides for second day with 1% fall: What's weighing on IT stocks?

The latest inflation data in the US for January, which showed a surprise increase, has kept domestic IT stocks listless from last week

Shares of IT companies were under selling pressure for a second session on Tuesday with the Nifty IT index dropping nearly 1 per cent intraday. 

Large Cap stocks Infosys, HCLTech, TCS and Wipro were trading 0.6-1 per cent lower Tuesday, while Coforge was the leading loser on the Nifty IT index, down 1.7 per cent. 

The latest inflation data in the US for January has kept domestic IT stocks listless from last week.

The Nifty IT index had dropped 1 per cent on February 14 after US CPI showed a higher-than-expected surprise growth in January, promoting sharp reversal in bets of imminent rate cuts. 

A delayed start to global interest rate cuts will also result in a prolonged timeline for recovery in IT earnings, which have remained weak for multiple quarters on lower discretionary spending by global corporations, especially in the US and Europe. 

The US CPI rose 0.3 per cent on a monthly basis last month and 3.1 per cent year-on-year against projections of a 0.2 per cent monthly increase and 2.9 per cent annual gain.

Producer price index last week also rose 0.3 per cent in January, above expectations of a 0.1 per cent rise. 

The surprise surge in US prices has seen expectations of a Fed rate cut being pushed back to June against early hopes of March.  

As per CME FedWatch Tool, about 64 per cent interest rate traders in the US expect no change in Fed’s key rate in the May meeting, while 76 per cent expect the first rate cut when the central bank meets in June. 

That said, stretchy valuations are also raising concerns for IT stocks back home, which have seen a sharp reversal in recent months on bets of sooner rate cuts.  

The Nifty IT index is up 8 per cent so far in 2024 against a nearly unchanged Nifty50 index. 

Over the last six months, Nifty IT index has rallied 24 per cent while Nifty50 is up 15 per cent in this period. 

Despite slight cuts in guidance for FY24, IT management commentaries on green shoots in discretionary spend and traction in Generative AI were the silver linings in Q3, as per IDBI Capital.

“Expectation of Fed interest rate cut could also boost client budgets, though this seems difficult currently. This has led us to build in annual revenue increases of 7 per cent and 10 per cent for IT large-caps and 14 per cent 16 per cent for mid-caps in FY25 and FY26,” it said. 

Moreover, the recent run up has prompted the brokerage to be selective in IT stocks with Wipro and Infosys its top large cap picks and Sonata, Newgen and Cyient preferred in mid-caps. 

Thus, while Q4 is also expected to be muted for IT companies, a recovery in FY25 is estimated by several analysts.