Since Indian investors frequently revert to these equities during market downturns, the information technology (IT) sector is regarded as a defensive sector. However, the sector has not fared well when taking a protective stance during the recent selloff.
One of the sectors that has lost the most money this year is IT. In comparison to a 17 percent decline in the benchmark indexes during the same time span, the Nifty IT is currently down more than 20%.
In 2022, the constituents of the IT index are down up to 35 percent, with several plunging by almost half from their 52-week highs.
No stock has escaped the harsh selloff in the sector, whether it is TCS, the largest IT provider in India, or midcap L&T Tech. This occurs at a time when the rupee is weakening versus the US dollar, which is advantageous for India’s export-oriented information technology sector.
Given the selloff, should you be buying these stocks?
Analysts are not quite certain. They predict that IT equities will underperform for a time.
According to Vinod Nair, Head of Research at Geojit Financial Services, “the best for the IT industry may be over on a short to medium-term basis because valuations continue to be on the upper side compared to the long-term trend.”
For long-term investors, especially for top selections in IT and internet services, the downturn may present a chance, he continued.
Mphasis and L&T Tech Services are two midcap IT firms that are trading at a significantly higher value.
The market is anticipated to be cautious throughout the year, providing a chance to invest in defensives and avoid being impacted by inflation and an increasing interest cycle. The bulk of IT firms are selling close to their five-year average value.
Foreign Investors Are Extremely Bearish
The significant foreign investment in these enterprises is another factor contributing to the sector’s underperformance. For the past eight months, the Indian market has seen monthly outflows from foreign investors totaling tens of thousands of crores, with the IT and banking sectors suffering the brunt of the outflow.
In order to take advantage of a decadal growth opportunity, Indian IT businesses embarked on a recruiting rampage during the 2020–21 period, according to Vinit Bolinjkar, Head of Research, Ventura Securities.
However, Bolinjkar said that when limitations brought on by the epidemic began to loosen, “order flow growth started slipping and it may not expand in accordance with the staff cost of the firm.” A mismatch between revenue growth and personnel cost increases is anticipated in such a circumstance, which might have an effect on the profitability of IT firms in FY23 and FY24.
Analysts also point out that concerns about a potential US recession have made the outlook for IT equities worse. The North American continent accounts for the majority of income for IT businesses. Indian gamers will be directly impacted by any delay there.
A recession in the US economy during the next 12 months may arise from the US Federal Reserve raising interest rates more aggressively due to the ongoing macroeconomic uncertainties across the world and the decade-high inflation rate. In 2022, the Nifty IT index is predicted to fare poorly. Akhilesh Jat, Category Manager, CapitalVia Global Research, Equity Research.