IT stocks witness fresh turbulence; posts biggest decline in nearly 2 mths- QHN

Information technology (IT) stocks witnessed a fresh bout of selling after worries of slowdown in demand in the developed world spooked investors. The latest concerns were triggered by weak revenue guidance from a US IT services company called EPAM Systems.

As a result, the Nifty IT index closed at 28,689 points on Tuesday, with a decline of 550 points, or 1.9 per cent — the most since April 17. By comparison, the Nifty50 index rose by 5 points or 0.03 per cent.

Small- and mid-sized firms Persistent Systems, Coforge and Mphasis saw their share price tumble by around 4 per cent each. Meanwhile, top-tier firms Tech Mahindra, Infosys, TCS and Wipro were down between 1 per cent and 1.8 per cent, and were the top-four declining stocks on the Nifty.

The selling in IT shares came after EPAM cut its revenue growth outlook for 2023 by 5 per cent as the company expects a recovery in discretionary spending to take between two and four quarters.

 Analysts said delays in client decision-making and pullbacks in discretionary spending have implications for the growth of Indian IT.

“We expect revenues in Q1FY24E (estimates for the first quarter of the 2023-24 financial year) to be weaker than Q4FY23 across companies in our coverage universe. We believe that the demand environment is especially weak in the financial services and technology segments,” said a note by Kotak Institutional Equities (KIE).

The note added that a prolonged recovery in clients’ willingness to spend would imply downside risks to FY24 revenue growth estimates.

 “Noting the weak demand, we are surprised by the rally in stock prices across our coverage in the past month. We believe that upsides exist in Infosys and HCL Tech but are wary of other names,” the note said.

While the Nifty IT index rose 5.8 per cent in May, recouping its yearly losses, the 2023 calendar year has been a turbulent one for IT stocks. The Nifty IT index tumbled as much as 15 per cent from its 2023 high of 31,434 points on February 16 to 26,637 points on April 20.

The sell-off was triggered by weak results and guidance by Infosys amid a banking crisis in the US and Europe. However, buying interest once again emerged in IT stocks amid a rally in the US’s Nasdaq index. However, EPAM’s move to lower its full-year earnings and revenue guidance has once again clouded the outlook.

“The IT sector has been going in single-digit terms for a few years. Now even that growth seems to have come under pressure. The hiring hitting a new low signifies that pressure. The outlook is negative, at least for a few quarters,” said G. Chokkalingam, Founder of Equinomics.

The note by KIE said Indian IT has a more balanced discretionary and maintenance spending portfolio.

“Indian IT will benefit from cost take-out programs and mega deals. However, these positives are outweighed by the broader caution in spending, especially in the impacted verticals.”