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Business News/ Markets / Stock Markets/  Nifty IT index falls 2% dragged by Persistent, Coforge, Mphasis; why are tech stocks falling?

Most IT stocks ended with losses on Tuesday (June 6) dragging their sectoral index Nifty IT down by two per cent. The index opened at 29,003.50 against the previous close of 29,238.75 and closed 1.88 per cent lower at 28,689.05 with all 10 components in the red.

Shares of Persistent Systems, Coforge and Mphasis fell up to 4 per cent while those of Tech Mahindra, L&T Technology Services, Infosys and TCS fell up to two per cent. Shares of Wipro, HCL Tech and LTIMindtree fell up to a per cent.

Read more: Wipro closed today at 399.9, down -1.09% from yesterday's 404.3

The index, after a healthy gain of about six per cent last month, has been witnessing profit booking in June so far as investors fear that even if the Fed takes a pause in the June policy meeting, rates may be hiked later as the US jobs market remains tight and inflation remains elevated. This will hit the growth prospects of the US which is a crucial market for Indian IT companies. 

Moreover, a fresh wave of the selloff could be attributed to the updates by leading American IT company EPAM Systems which announced the reduction of its second quarter and full year 2023 financial outlook. As per a Yahoo Finance report, EPAM Systems, Inc., leading digital transformation services and product engineering company, today announced it is reducing its second quarter and full year 2023 financial outlook due to further deterioration in the near-term demand environment.

Brokerage firm Kotak Institutional Equities said it acknowledges that the impact on EPAM has been amplified by its high exposure to discretionary spending and certain company-specific factors.

"EPAM has cut its CY2023E revenue growth outlook again and now expects a two per cent constant currency revenue decline at the mid-point of the guided band. The company has now cut its CY2023E revenue growth expectation by nearly 13 per cent over two consecutive updates. The guidance cut has been attributed to (1) continued client caution on ‘build’ spends, (2) a slower-than-assumed rate of pipeline conversion and (3) some reduction in the total pipeline," Kotak said.

"The slowdown in discretionary spending would have implications on Indian IT, with Q1FY24 likely to be weak. We believe the recent run-up in the sector has been ahead of fundamentals," said Kotak.

Nifty IT index is flat for the year 2023 so far against a 2.7 per cent gain in the benchmark Nifty50. Shares of Persistent Systems are up 329 per cent for the year while those of Coforge are up 14 per cent and LTIMindtree is up 12 per cent. On the flip side, shares of Infosys are down about 15 per cent this year.

Worsening economic conditions in critical global markets such as the US and Europe have kept the gains of IT stocks capped. As Mint reported earlier, the January-March quarter (Q4FY23) numbers of Indian IT companies came on the softer side with signs of stress due to the economic slowdown in the key markets including the US and Europe. Their numbers were mixed but the management commentary hinted that the road ahead was challenging.

Analysts observed that tier-I's fourth-quarter revenue performance was impacted by the moderation in the BFSI vertical and continuing weakness in retail and hi-tech. Moreover, the delayed ramp-up of projects and macroeconomic uncertainty were the major contributors to their weak show.

Read more: IT sector Q4 results review: Mixed numbers, cautious outlook; what's the road ahead?

As per the estimates of brokerage firm Motilal Oswal Financial Services, IT companies reported a mixed performance overall in Q4FY23, with tier-1 firms delivering muted revenue growth and modest margins and tier-2 companies outpacing the tier-1 pack with stronger revenue growth.

"Our IT Services coverage universe delivered the dollar revenue growth of 0.3 per cent quarter-on-quarter (QoQ) and 6.9 per cent year-on-year (YoY), while EBIT margin declined by 25bp QoQ and 50bp YoY in Q4. PAT growth in the rupee terms came in at 0.4 per cent QoQ and 8.6 per cent YoY. Q4 deal momentum was relatively soft compared to the previous quarters, on account of higher deal scrutiny, an elongated sales cycle and delays in approvals," said Motilal Oswal.

Highlighting the major EPS (earnings per share) upgrades and downgrades, Motilal Oswal said Infosys FY24E and FY25E EPS were lowered by 3.9 per cent and 4.8 per cent, respectively. Mphasis FY24E and FY25E EPS were downgraded by 9.8 per cent and 6.4 per cent, respectively. Zensar FY24E and FY25E EPS were upgraded by 18.1 per cent and 16.4 per cent respectively.

The brokerage firm prefers tier-1 companies in the Indian IT space.

"Despite few tier-2 companies outpacing tier-1 players over the last couple of quarters, we still remain positive on tier-1 companies, given their wider range of offerings and disproportionate benefits in a cost-focused environment. Moreover, the current valuation of tier-1 companies (median nearly 17 times one-year forward PE) with robust payout yields (about +5 per cent in FY25E) gives us comfort. We continue to prefer TCS, HCLT and Infosys (in that order) for their robust business models, high return ratios, and strong management teams," Motilal Oswal said.

Read more: TCS to HCL Tech: Why you should buy IT stocks before RBI MPC meeting outcome

Rupee's resilience against the dollar has also dented the prospects for Indian IT stocks. For the calendar year, the Indian rupee is up about half a per cent.

A strong rupee is considered negative for Indian IT companies as they significantly rely on exports for their revenue. When the rupee strengthens, foreign clients find it expensive to pay for Indian IT services and tend to seek cheaper alternatives from countries with weaker currencies. This reduces the competitiveness of Indian IT companies in the global market.

Moreover, analysts said a stronger rupee means that the revenue earned in foreign currencies will translate into fewer rupees. This can squeeze the profit margins of the IT companies further, as the cost of operations in India remains the same while the revenue earned in foreign currencies decreases.

Read all market-related news here

Disclaimer: The views and recommendations given in this article are those of individual analysts and brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Updated: 06 Jun 2023, 04:34 PM IST
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