While the benchmark index, Nifty 50, is hitting new highs, the Nifty IT index has plummeted over 24% so far in 2022. Is this an early indication of winter coming for these Indian IT companies? Let’s find out.
The IT industry, which was once known as the sunrise industry, is going through dark times today. On the one hand, the Nifty 50 index is hitting new highs, while on the other, the Nifty IT index has plummeted by around 24% in a year (as of 13th December 2022).
Moreover, the performance of the Nifty IT index has also marked the end of a five-year-long record of positive returns from the benchmark Index.
Why are IT Stocks Tumbling?
Most IT companies earn the majority of their profits from their global clients. As the global markets have been under pressure, IT companies have also felt the heat.
The aggressive interest rates tightening in the US and European countries have led to fears of recession. This sentiment has affected many companies globally. Borrowings have become costlier, leading to a fall in revenues of companies. All of this has pushed the outlook for Indian IT companies into darkness.
As per the data available on NSDL, in fear of an upcoming recession in the US, foreign investors have pulled out over $9 billion from the IT sector in 2022. This accounts for around 50% of the net foreign portfolio outflows in the year.
As per a report by Moneycontrol, the analysts at Credit Suisse Securities India said, ‘The valuations of IT companies are stretched by every measure, and we believe this will drive correction if the US macro weakens’.
However, the IT sector is also taking pills to recover from the situation. During the first quarter of 2022, the top IT firms believed that subcontracting and talent costs weighed on the company’s margins. Hence, they tapered subcontracting costs and moved to a lower magnitude of salary hikes and bonus payouts.
According to Moneycontrol, the hiring slowdown across big tech companies will benefit the overall IT services ecosystem.
But, looking at the global scenario, the winter is indeed going to be long for the IT sector.
* The companies mentioned in the article are for informational purposes. This is not investment advice.