Will IT stocks continue to underperform?

Indian equities succumbed to global sell-off last Friday as the World Bank warned against a global recession in 2023.

This, the agency said, would be on the back of the central banks across the world simultaneously hiking interest rates in response to inflation.

The benchmark S&P BSE Sensex plunged 1,093 points to end near 58,840 level. The Nifty50, meanwhile, gave up 17,550.

The Nifty IT index, which sunk close to 4% Friday, was one of the worst impacted pockets last week.

The index dropped 7% during the period after a surprise increase in US retail inflation for August raised bets for aggressive rate hikes by the Federal Reserve. On a year-to-date basis, the index is down 31%, even as the Nifty50 index is up 1%. 

Against this backdrop, analysts foresee more pain for the Indian IT companies, which have recently started freezing employee payouts to mitigate margin pressures.

AK Prabhakar, Head of Research, IDBI Capital, more correction likely in IT stocks. Pick banks, consumption stocks over IT. IT, metals will underperform the market. Expect revenue slowdown, margin contraction for IT cos ahead. 

Global brokerage Nomura, also, sees emerging evidence for revenue growth slowdown for the sector in the calendar year 2023 and financial year 2024. The brokerage notes, “We retain our cautious stance and believe that investors are likely to get disappointed with margins in FY23 and growth in FY24”  

Meanwhile, Goldman Sachs has downgraded Tata Consultancy Services and Infosys to ‘sell’, from ‘buy’

It opines that “A slowdown in discretionary IT services spend will be quite material and something not yet completely reflected in the street’s double-digit revenue growth forecast for the industry for FY24” 

Technical charts, too, project a weak outlook for related stocks.

Avdhut Baghkar of Business Standard says Nifty IT needs to hold 30,000 to see a breakout. Except L&T Tech and LTI, other stocks appear weak. Mphasis, Infosys and Coforge could slide 10%.

This week, investors will track the US Fed’s rate hike decision on Wednesday, which will guide the near-term market trajectory. Bank of England’s policy rate outcome will also be monitored on Thursday.