The BSE IT index, a gauge for the performance of leading tech companies, saw its biggest decline in nearly two years after disappointing earnings posted by Infosys triggered a broad-base selloff.
Infosys, the country’s second-largest software services provider, March 2022 quarter profits came in below expectations due to margin pressure amid rising costs and lower utilisations. The numbers stoked fears that the post-pandemic boom could be over and there could be de-rating in stocks as growth normalizes.
Shares of Infosys closed 7.3 per cent lower to Rs 1,621. The stock hit its lowest level in eight months in intra-day trade. The BSE IT index fell 4.76 per cent—its worst single-day fall since May 4, 2020. The Nifty IT fell 4.6 per cent with Mphasis dropping 5.6 per cent, Tech Mahindra declining 4.7 per cent and L&T Technology Services dipping 4.5 per cent.
Earlier, Tata Consultancy Services, the number 1 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
Some said Monday’s fall in IT stocks had also to do with global tech selloff.
“The results were not far away from expectations. The Nasdaq 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 post-pandemic era. However, some 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 cost, said analysts. While IT companies are trying to increase prices to offset some of these pressures, analysts say these will take time and in the interim there could 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.
“The valuations are reasonable now. I don’t think they will fall significantly. They 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 the large-cap IT stocks are concerned, we are near the bottom,” said Chokkalingam.
“The orders coming for IT companies will be large going forward. For large companies, there won’t be much trouble going ahead. It is a temporary blip, and investors should utilise this to buy IT stocks,” added Baliga.
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