Analysts predict IT stocks will remain under pressure amid global headwinds

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• Jul 10, 2022 | Poonam Nath

So far this year, the Sensex has fallen 3,771.98 points or 6.47 per cent. On June 17, it reached a 52-week low of 50,921.22.

Digital Desk: Analysts predict that information technology stocks will remain under pressure soon due to headwinds from the worsening economic situation in key global markets and financial market volatility.

While TCS, the country's largest software exporter, reported a 5.2% increase in June quarter net profit on Friday, kicking off the latest earnings cycle, IT shares have been falling, with the BSE Information Technology index down nearly 24% this year.

Cross-currency headwinds and large-scale talent churn resulting in higher wage hikes could also add to the challenges, according to analysts, particularly in terms of the impact on operating margins.

Though it is too early to conclude, ongoing political developments in the United Kingdom, where Indian-origin Rishi Sunak has put his hat in the ring to become Prime Minister, are also closely monitored. Sunak is the son-in-law of N R Narayana Murthy, co-founder of Infosys.

"The macro-environment in the United States and Europe appears to be deteriorating... The IT sector will be affected... Aditi Patil, the Research Associate at brokerage firm Prabhudas Lilladher, remarked, she also said that IT stocks would likely remain under pressure.

The five IT constituents of the 30-share benchmark Sensex have fallen up to 43% this year, reflecting the gloom.

So far in 2022, Tech Mahindra has fallen 42.68 per cent, Wipro has fallen 41.38 per cent, and HCL Technologies has fallen 25.38 per cent. TCS and Infosys, two IT behemoths, have declined by 12.63 per cent and 19.87 per cent, respectively.

So far, in 2022, the BSE Information Technology index has fallen 9,046.44 points or 23.90%. On June 17 of this year, it reached a 52-week low of 26,827.24. It reached an all-time high of 38,713.3 points on January 17.

So far this year, the Sensex has fallen 3,771.98 points or 6.47 per cent. On June 17, it reached a 52-week low of 50,921.22.

While IT companies are likely to face some margin pressures due to cross-currency headwinds in the near term, Tanusree Banerjee, Co-Head of Research at Equitymaster, believes vendor consolidation and captive monetisation efforts will help gain market share.

"The long-term outlook remains positive, with deal pipelines remaining strong," Banerjee added.

In a report last week, rating agency Crisil predicted that revenue growth in the information technology services sector would fall sharply to 12-13 per cent in FY23, down from 19 per cent in FY22.

According to the Crisil report, the current rupee depreciation and strong demand for new-age technologies such as artificial intelligence, cloud computing, and the Internet of Things will help the USD 220 billion sectors maintain double-digit growth.