The BSE IT index, a gauge for the performance of leading tech companies, saw its biggest decline in nearly two years of 4.76 per cent, after disappointing earnings posted by Infosys triggered a broad-base sell-off. The Nifty IT index fell 4.6 per cent.
The profit posted by Infosys, the country’s second-largest software services provider, for Q4FY22 was below expectations because of margin pressure amid rising costs and lower utilisations. Its results stoked fears that the post-pandemic boom could be over and there could be de-rating in stocks because of normalisation of growth.
Shares of Infosys closed 7.3 per cent lower at Rs 1,621. The stock hit its lowest level in eight months in intraday trade. Also, Mphasis slipped 5.6 per cent, Tech Mahindra declined 4.7 per cent, and L&T Technology Services fell 4.5 per cent.
Earlier, Tata Consultancy Services, India’s top software exporter, had also missed earnings but only slightly. Shares of TCS fell 3.7 per cent on Monday.
“TCS’ results were a mixed bag but Infosys results were disappointing. For Infosys, the management commentary was on the weaker side. Not many people expected these numbers because we were not expecting order flows to get affected in the IT space,” said Ambareesh Baliga, independent market analyst
According to some experts, Monday’s fall in IT stocks had also to do with the global tech sell-off. The decline was the sharpest for the BSE IT index since May 4, 2020. “The results were not far away from expectations. Nasdaq’s one-year returns have turned negative now, which is affecting sentiment,” said G Chokkalingam, founder, Equinomics.
The IT pack has been the best-performing sector in the pandemic era.
However, part of the exuberance has come off this year as investors have scaled back their lofty expectations. Key factors impacting IT companies are higher-than-usual salary increments and normalisation of discretionary spends like travel and visa costs, said analysts. While IT companies are trying to increase prices to offset the pressure, analysts say this will take time and in the interim, there can be pressure on margins.
After the latest decline, the BSE IT index is down 13 per cent on a year-to-date basis. In comparison, the Sensex is down less than 4 per cent. The correction has helped cool off valuations, which had reached historical levels earlier this year. The 12-month forward price-to-earnings (P/E) multiple has come down from 32 times during the start of the year to 26 times at present.
“Valuations are reasonable now. I don’t think they will fall significantly. IT firms will have the advantage of the overall macro environment now, with oil prices rising and overseas investors selling, which will ultimately lead to a fall in the rupee. That will rescue the IT pack after a few days or weeks. As far as large-cap IT stocks are concerned, we are near the bottom,” said Chokkalingam.
“The orders coming for IT companies will be large. For large companies, there won’t be much trouble going ahead. It is a blip, and investors should utilise this to buy IT stocks,” added Baliga.