Why has the IT index been hit so hard in recent months?

The IT stocks have been under a lot of pressure in recent days. Most of the top brokerage houses have rushed to downgrade their recommendations and targets on Infosys after the quarterly results and the guidance. Till now, only Infosys and TCS have announced their quarterly results for Q4FY23 and the full year. But, the pressure is likely to be visible across the IT sector. Let us look at the IT index on the NSE as a proxy for the Indian IT sector. Here is a quick look at the key parameters to take a view.

Data Source: NSE

A quick glance at the IT index tells you there is a lot of pressure on the IT stocks. Here are some numbers.

• The IT index, which is the benchmark of a representative mix of IT companies is down 17% for the year and 5.9% for the month. If you look at the relative journey from the yearly highs and the yearly lows, the IT index is just 3.75% from the lows of the year but a full 17.04% below the high of the year.
   

• Let us now turn to the yearly returns on all stocks in the IT index. Out of the 10 stocks in the IT index, 8 stocks have given negative returns on a yoy basis with Mphasis, Wipro and Tech Mahindra showing the deepest cuts. The only IT company to give marginally positive returns in the last one year is Persistent Systems.
   

• What about the returns over the last one month? Not surprisingly, Infosys has been the worst performer, falling 11.36% in the last one month. On a MOM basis, 9 out of the 10 stocks in the IT index are in the negative with the only exception being Coforge, which is up by around 3.26% on a MOM basis.
   

• In majority of the stocks, the fall from the highs is much sharper than the bounce from the low, showing the amount of pressure that IT stocks are under. HCL Tech, Persistent and Coforge are the exceptions to this trend.

What has been the trigger for this sharp underperformance of the IT stocks?

Number of domestic and global triggers

There have been a mix of domestic and global triggers for the weak performance of the IT stocks, but triggers are predominantly global.

• It is expected that the series of rate hikes by the US Fed should exert pressure on the US economy resulting in a slowdown in growth. That would translate into weak tech spending as is already evident. That is the reason, most of the IT companies are already cautious about their top line growth in constant currency terms.
   

• Another negative cue is the banking sector crisis in the US. Most of the Indian IT companies, especially the likes of Infosys and TCS, still depend heavily on the BFSI sector for their business volumes. With the crisis in banking, mid-sized banks are likely to conserve cash for capital rather than on tech spending.
   

• Thirdly, the normal fallout of such an event is the pressure on margins. Typically, the tech clients would bargain for squeezing more value for money and would bargain for thinner margins for the IT companies. With competition rising in the IT space, the fear is that this could be a real pressure point.

These 3 factors have made IT analysts and fund managers cautious on IT sector. It has also not helped that in the last few months, bulk of the FPI selling in India has been centred on the IT sector and that is the sector that has seen the maximum FPI AUC loss. For now, it looks like markets are preferring to even err on the side of caution.