For IT sector, the New Year starts with warnings

IT stocks fell by around 2% in the first two days of trading this year, underperforming the broad market


Most of the IT stocks had underperformed the markets by quite a margin in 2016. Photo: Mint
Most of the IT stocks had underperformed the markets by quite a margin in 2016. Photo: Mint

Both Infosys Ltd and Wipro Ltd have warned employees about rising threats to the IT services industry. Vishal Sikka, chief executive officer, Infosys, said in a letter to employees, “The world around us seems ever more influenced by the baser instincts and tendencies.” A note by Azim Premji, chairman, Wipro, spoke of “forces that want to shape the world into a place of exclusion, conflict and suspicion”.

To be fair, Sikka devoted a large part of his letter asking employees to create value for customers by embracing automation and innovation. Still, the fact remains that the Trump election has increased uncertainty for the industry.

Analysts at Kotak Institutional Equities said in a recent note to clients, “The broad stance of Mr. Trump on immigration, the presence of select long-time proponents of visa reforms in his cabinet and Republican control over both Senate and House of Representatives increase the risk of implementation of visa restrictions. Expect investor focus on exposure to H-1B visas and risk mitigation measures in case minimum H-1B wages were to be hiked.”

IT stocks fell by around 2% in the first two days of trading this year, underperforming the broad market. Most of them had underperformed the markets by quite a margin even in 2016.

But in the midst of all the gloom, some green shoots may be emerging. Kotak’s analysts say there are initial indications of higher spending in the financial services vertical, besides announcements of integrated digital deals (although these are sporadic as of now). They add that the shift of outsourcing work to captive centres isn’t as intense as it was at the beginning of 2016. And then, of course, there is the likelihood that the US economy may finally start to grow strongly—the US manufacturing Purchasing Managers’ index for December came in at a 21-month high. Even Europe seems to be doing better, with the December 2016 manufacturing PMI for the Eurozone at its highest since April 2011.

Of course, it remains to be seen if companies attest to all of these positives when they announce their December quarter results. If the commentary is as dreary as the New Year memos were, investors may prefer to remain on the sidelines for some more time.

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