Markets

Published: June 7, 2023
Updated: June 7, 2023

Tech Stocks Slide as Nifty IT Index Drops 2%, Led by Persistent, Coforge, and Mphasis

The Nifty IT index experienced a significant decline of 2% as all its components closed in the red. The IT sector is grappling with challenging economic conditions in crucial global markets, leading to a downward trend. This article examines the reasons behind the fall in tech stocks and its impact on the Nifty IT index.

Downturn in IT Stocks:

On Tuesday, the Nifty IT index witnessed a decline of 1.88%, opening at 29,003.50 and closing at 28,689.05. Persistent Systems, Coforge, and Mphasis were among the major IT stocks that saw losses of up to 4%. Additionally, Tech Mahindra, L&T Technology Services, Infosys, and TCS experienced declines of up to 2%, while Wipro, HCL Tech, and LTIMindtree fell up to 1%.

Factors Influencing the Decline:

The current downturn in the IT sector can be attributed to various factors. Firstly, investors are concerned about potential rate hikes by the US Federal Reserve, despite a temporary pause in the June policy meeting. The tight US job market and persistently high inflation have raised fears of future rate increases, impacting the growth prospects of the US, a crucial market for Indian IT companies.

EPAM Systems' Outlook Impact:

The recent sell-off in IT stocks can also be attributed to an announcement by EPAM Systems, a leading American IT company, regarding a reduction in its financial outlook for the second quarter and full year 2023. EPAM cited a further deterioration in the near-term demand environment as the reason for the downward revision. This news has amplified concerns in the IT sector, particularly due to EPAM's high exposure to discretionary spending and company-specific factors.

Market Performance and Outlook:

The Nifty IT index has remained relatively flat in 2023, in contrast to the 2.7% gain in the benchmark Nifty50. While Persistent Systems has witnessed a remarkable 329% increase, Coforge and LTIMindtree have shown gains of 14% and 12%, respectively. However, shares of Infosys have declined by approximately 15% this year. Worsening economic conditions in critical global markets, such as the US and Europe, have limited the growth potential of IT stocks.

Challenges Faced by Indian IT Companies:

The Q4FY23 results of Indian IT companies indicated signs of stress due to the economic slowdown in key markets like the US and Europe. Tier-I companies faced revenue moderation in the BFSI vertical, along with ongoing weakness in the retail and hi-tech sectors. Delayed project ramp-ups and macroeconomic uncertainties further contributed to their underperformance.

Analyst Insights and Outlook:

Motilal Oswal Financial Services noted mixed performance among IT companies in Q4FY23. Tier-1 firms reported muted revenue growth and modest margins, while tier-2 companies outperformed with stronger revenue growth. EPS upgrades and downgrades were observed for various companies, with tier-1 companies preferred due to their wider range of offerings and robust business models. The resilience of the Indian rupee against the dollar has also impacted Indian IT stocks negatively, as a strong rupee makes exports more expensive and affects profit margins.

The decline in tech stocks, as reflected in the Nifty IT index, can be attributed to worsening economic conditions in key global markets, concerns over potential rate hikes, and the impact of EPAM Systems' outlook revision. Indian IT companies have faced challenges in the form of revenue moderation and macroeconomic uncertainties. Despite these challenges, the performance of tier-1 companies and their robust business models provide optimism for the future. Monitoring currency trends and keeping eyes on various evolving global cues will help to weather the ups and downs in the stock markets.