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Indian IT stocks may just bleed some more but don't panic — they have dealt with uncertainty before, say experts

Indian IT stocks may just bleed some more but don't panic — they have dealt with uncertainty before, say experts

By Sandeep Singh  May 27, 2022 7:35:38 AM IST (Updated)

Indian IT stocks have suffered steep losses over the past few months and there's no sign of relief for investors. TCS, Wipro, Infosys, Tech Mahindra and HCL Tech have fallen up to 15 percent in just one month.

The Indian IT space is deep into the bear zone on Dalal Street thanks to aggressive hikes in COVID-era interest rates and fears of slowing global growth — a deadly combination already spooking investors the world over.

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Even the rupee's slump to all-time lows against the US dollar — which typically draws investor attention to the prospect of better profitability ahead for exporters — has done little to arrest the Nifty IT's fall.
Indian IT's stark underperformance to Dalal Street benchmarks comes when concerns about margin pressure in the sector is denting the appeal of improving management optimism.
Despite higher demand during the pandemic, IT companies struggle against higher employee costs in a bid to tackle persistent high attrition.
Can you call the bottom for IT yet in what some are calling one of the slowest bear markets?
Market expert Ajay Bagga told CNBCTV18.com he remains cautious on IT and he cannot call the bottom for now as there may be more pain ahead.
"Investors can wait ahead of rate hikes by the RBI and the Federal Reserve, and balance sheet normalisation by the US central bank," he said.
The remarks from the market veteran come at a time when brokerages have started to downgrade the space on the pretext of valuations being expensive.
JPMorgan is of the view that Indian IT stocks are among the most expensive in the services space globally.
Growth in the sector, according to the brokerage, has started to slow down from January-March 2022 and is likely to worsen into the year ending March 2023 "from tougher comps, supply issues and eventually a worsening macro".
"With peak sector growth behind, growth deceleration should continue to weigh on sector multiples," it said last week.
Even though Indian IT valuations have contracted materially, the price paid for high earnings growth stays elevated, according to ICICI Securities.
Nomura, which recently downgraded TCS, Wipro, HCL Tech, L&T Infotech and Persistent, has only two stocks in the 'buy' rating category: Infosys and Tech Mahindra.
The brokerage said it prefers largecaps to midcaps in IT.
Talk of recession
"Increasingly, there is so much talk about the US going into recession, which hurts technology spending, resulting in a slowdown of growth for Indian IT services. What actually has happened is that the sector is getting a macro pressure point," Raj Vyas, Portfolio Manager at Teji Mandi, told CNBCTV18.com.
The market is anticipating the situation in the next 12-18 months, and fears that expectations on the margin front are way too high, he said.
Yet, Vyas believes that as long as the demand environment is firm for Indian IT services, investors should not be worried as the stocks will bounce back.
And he is not alone among the more optimistic lot on the Street, who pick value over growth.
In UTI Mutual Fund EVP and Fund Manager Ajay Tyagi's view, the derating has led to better value being offered by the Indian IT. “I think value is emerging in the IT services space," he told CNBC-TV18.
"Of course, they still might continue to be laggards or move sideways in the short term, seeing the kind of volatility... These companies have a history of dealing with all such kinds of uncertain environments, so it’s not new for them," added Vyas. 
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