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How Macro Concerns have Pushed Tech Stocks into the Red

How Macro Concerns have Pushed Tech Stocks into the Red

Macro concerns point towards gloomy days ahead for battered IT stocks. But there is a silver lining

Whatever descriptor you choose for the current state of IT shares, the underlying reality is: it’s bloody out there. Whatever descriptor you choose for the current state of IT shares, the underlying reality is: it’s bloody out there.

Higher odds of a recession in developed markets, soaring wage bills and a subdued global macro environment have pushed 97 per cent of information technology (IT) shares on Indian bourses into the red so far this year. Is it a correction or a bear market? Whatever descriptor you choose for the current state of IT shares, the underlying reality is: it’s bloody out there.

The BSE IT index cracked 26.91 per cent on a year-to-date (YTD) basis till July 12, 2022, even as the benchmark BSE Sensex declined 7.49 per cent during the same period. Brightcom Group emerged as the top loser with a fall of 57 per cent. Shares of Xelpmoc Design and Tech, 3i Infotech and Zensar Technologies also tanked by over 50 per cent. “The significant price correction was due to a series of macro events, broader market weakness and a potential recession in the US and Europe,” says Ashis Dash, IT Analyst at Sharekhan by BNP Paribas.

Even the major companies were not spared. Tata Consultancy Services (TCS), Infosys and HCL Technologies plunged 17 per cent, 24 per cent and 30 per cent, respectively, during that period. “Indian IT companies have underperformed as market participants fear a slowdown in IT services, given the worsening global macro environment,” says Aditi Patil, Research Associate at Prabhudas Lilladher.

The other reason for this rout, according to Niteen S. Dharmawat, Co-founder of Aurum Capital, is that the IT stocks have significantly run up during a post-Covid-19 rally with a lot of optimism about digital business opportunities. “While the digital opportunity was for real and the Indian IT companies did get an opportunity to participate in the digital business, as it happens, the over-enthusiasm took the valuations beyond normal. This is a typical cycle. Now, we are witnessing the mean reversion.”

Is there an end to it? Experts hold a mixed view on the near-term outlook for IT stocks. Macro concerns will lead to trimming down of tech spending going ahead, they feel. “Weak global growth is likely to impact the earnings of companies, and thus, result in a reduction in technology spending,” explains Prabhudas Lilladher’s Patil.

Despite the sell-off, valuations of at least 23 stocks in the sector are still hovering above their historical five-year averages. This includes players like Mindtree, eClerx, HCL Technologies, Tech Mahindra, L&T Infotech and Mphasis, among others. Considering the valuations, Patil says, “There is further scope for stocks to fall on signs of a slowdown in tech spends by their global clients.”

But there is a silver lining. This is also a good time to buy quality stocks, given the best-in-class operating metrics, breadth of capabilities and potential to gain market share even in a weak macro scenario, says Patil of Prabhudas Lilladher.

 

@iamrahuloberoi