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Business News/ Markets / Stock Markets/  Infosys share price plunges 10%, Nifty IT index cracks over 4%; what should investors do with IT stocks?

Infosys share price plunges 10%, Nifty IT index cracks over 4%; what should investors do with IT stocks?

IT stocks, including Infosys, plunged in early trading on Friday after Infosys reported weak Q1 earnings and lowered its guidance for FY24.

IT stocks declined in trade on Friday. (Agencies)Premium
IT stocks declined in trade on Friday. (Agencies)

IT stocks went into a tailspin in early deals on Friday with their sectoral index falling over 4 per cent and stocks such as Infosys plunging almost 10 per cent. The fresh jolt to sentiment came from poor June quarter earnings of IT major Infosys which lowered its guidance for FY24.

Infosys' share price opened 9 per cent lower at 1,320.20 against the previous close of 1,449.50 and soon extended its loss to 10 per cent to touch the 1,305 mark. Infosys stock traded 8.12 per cent lower at 1,331.85 around 9:30 am.

Shares of HCL Tech, Wipro and TCS fell over 2 per cent each in trade.

Infosys on Thursday reported its weakest June quarter revenue growth since FY21 and slashed its annual sales forecast for the current fiscal year.

It said in constant currency terms, which does not account for currency fluctuations, revenue rose one per cent from the preceding quarter and 4.2 per cent from the year earlier to touch 37,933 crore. Net profit rose 10.9 per cent from a year earlier to 5,945 crore, while operating margin came in at 20.8 per cent, in line with its guidance of 20-22 per cent for the fiscal.

Analysts surveyed by Bloomberg estimated a June quarter profit of 6,245 crore on revenue of 37,843 crore.

Moreover, Infosys also revised its FY24 revenue growth guidance to 1-3.5 per cent, down from 4-7 per cent given at its FY23 earnings conference on 13 April.

Read more: Infosys cuts FY24 forecast, misses Q1 profit estimates

Read more: Infosys Q1 Result: Revenue guidance trimmed, headcount falls QoQ; six key points from the IT major's Q1FY24 earnings

The Nifty IT index was down 3.27 per cent at 30,128.70 around 9:30 am with all components in the red. 

Read more: Why Infosys shares nosedived 10% after Q1 results 2023 — explained

What should investors do with IT stocks?

While top IT companies have said the road ahead for FY24 is going to be tough, investors need to adjust their strategy for the sector. Mint talked to several analysts to understand what strategy investors should follow for IT stocks. Here's what they said:

Deepak Jasani, Head of Retail Research, HDFC Securities

IT stocks have come under selling pressure post Q1 numbers from some of these companies. This reflects the stiff near-term challenges confronting the IT sector that includes a challenging macroeconomic environment.

Slowing down or stopping IT discretionary spending by industries in the financial services, mortgages, hi-tech, telecom and retail space has impacted revenue booking and hence profitability. They feel that the second half of the fiscal could see a revival in IT spending.

Recessionary headwinds in the US and Europe remain the key concern area for the sector and one is not sure as to whether this headwind will reduce/disappear soon.

Kaushik Dani Fund Manager - PMS Abans Investment Managers

Some of the key large-cap IT companies have come out with first-quarter numbers. Markets had more or less factored subdued results for this quarter on account of weak global macros and possible delays in client spending. 

The wage hike impact also contributed to weaker margins. What came as a negative surprise is a downward revision in the outlook for some trendsetters. We believe it would be challenging for the sector in the near to medium term. However, the long-term remains firm on account of a positive demand environment and reasonable valuations.

Dhruv Mudaraddi, Research Analyst, Stoxbox

Though the recent quarterly numbers from the IT companies were not flattering, market participants took solace in the strong deal pipeline of major IT companies which supported recent gains in the overall sector. However, most companies are still uncertain about the near-term headwinds in their major geographies and business verticals.

Though the long-term structural story of the IT services sector is positive with strong cash flow generation capabilities, the near-term outlook remains cloudy as clients continue to defer discretionary spending with cost-optimization projects taking the front seat.

Moreover, delayed starts to new projects are reflected in the hiring plans of the major IT companies, with increased operational efficiencies likely to drive profitability going ahead. We advise long-term investors to adopt a staggered approach to investing in the IT sector as we expect the situation to be clearer over the next 2-3 quarters.

Dinesh Gupta, Fund Manager, Torus Oro PMS

There are concerns regarding the evolving macroeconomic situation and signs of a slowdown in discretionary spending especially in sectors such as retail and mortgage. There are visible signs of moderation in the near-term demand environment as there has been some increase in the deal conversion cycle and it would adversely impact revenue growth for IT services companies for FY24.

However, the valuation of Indian IT services companies appears reasonable. Currently, a broad set of tier 1 and tier 2 IT companies trade at around a 5-year historical average valuation. We would prefer tier 2 IT stocks which are operating in niche IT services and industry segments and are not directly impacted by the above factors.

Shrey Jain, Founder and CEO of SAS Online - India's Deep Discount Broker

The IT sector enjoyed robust growth momentum in 2020-21 and 2021-22 while recovering from the post-Covid phase. The weakness in the sector is anticipated to be driven by tech spending cuts by clients in the current uncertain macro environment.

Premium growth in the Indian IT sector has shrunk and FY24 is expected to witness a mean reversion towards growth. It is crucial to focus on the commentary and updates regarding Q2FY24 growth. There is a possibility that demand and the sector's performance might recover later in the year.

Read all market-related news here

Disclaimer: The views and recommendations above are those of individual analysts and broking companies, not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 21 Jul 2023, 09:24 AM IST
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