IT stocks fell the most last Friday, dropping by 4%, almost double the rate at which the broader markets fell. This comes on the back of a marginal underperformance during the results season. As a result, the CNX IT index on the National Stock Exchange has now dropped by 11% since the results season began last month, compared with a 7% drop in the benchmark Nifty.
Investors are cutting exposure to mitigate the risk of a recession in the US. During the financial crisis in 2008 and 2009, information technology companies saw a marked decline in growth rates. The Street’s view seems to be that a repeat is possible, what with the negative news flowing out of the US economy.
Also See | Increased Uncertainties (PDF)
Interestingly, leading IT companies such as Tata Consultancy Services Ltd and Cognizant Technology Solutions Corp. have been rather upbeat about the demand environment for IT services.
Just last Wednesday, or a day before the crash in the US markets, Cognizant’s chief executive officer Fransisco D’Souza said in a post-earnings analysts’ call: “While uncertainty has certainly increased in the macro environment, clients recognize that volatility as the new normal. We see a pipeline that is quite robust and the traditional summer lull is absent.”
Cognizant’s revenue in the June quarter was $35 million more than what it had forecast. It also raised its guidance for the second half by $100 million.
In other words, it expects the strength in demand to sustain in the second half of the year, despite the fact that the uncertainties in the US economy and the Euro zone have increased.
Cognizant’s views are echoed by most companies in the sector, including the new bellwether, TCS. The only company that sounded genuinely cautious about the macro economic situation was Infosys Ltd, which left the guidance for the rest of the year practically untouched, citing that the increased uncertainty is affecting decision making by firms.
Which of these statements should investors rely on? It’s important to note that companies such as Cognizant and TCS have been qualifying their statements saying that they are based on things they know today. There’s little doubt in anyone’s mind that if the economic situation worsens and companies in developed countries hold cash and cut back on spending, demand for IT services will get affected.
On the other hand, if things remain the way they are and the feared disasters in the global economy are averted, IT stocks will see a relief rally because they are currently pricing in some probability of a cutback in demand.
Graphic by Sandeep Bhatnagar/Mint
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