IT stocks come under pressure on tapering demand

Nifty IT index is down by close to 20 per cent this year so far. Most mid-cap stocks have corrected around 30 per cent in the recent months. Not only mid-tier IT companies, even large caps including Infosys, HCL Technologies, and Wipro are substantially down from the recent highs. Contrary to the usual movement during a buyback announcement, share price of Tata Consultancy Services is nowhere near to its buyback price of Rs4,500 announced by the company. So, the party in technology stocks seems to be over for now. With consistent selling by FIIs, Indian equity markets are under pressure. Technology stocks, which are one of favourites of FIIs, are witnessing a rapid fall. And this phenomenon is not restricted to India. Nasdaq, the exchange with the maximum technology stocks, is also facing severe pressure. Many big names including stock price of Amazon has corrected 26 per cent in the last one month. Most recently listed technology startups in India are also witnessing similar fate.

Such fall in technology stocks prompt industry watchers to opine that hyper-demand environment seen during the pandemic is now over. The Russia-Ukraine war has thrown all macroeconomic calculations of nations out of the window. The world has already been reeling under the vagaries of the Covid pandemic. When a condition of nascent recovery was coming back, the war has changed the whole equation. Currently, the world is facing an inflationary environment due to rise in prices of oil and gas. As hydrocarbon affects every commodity of the world, prices of all commodities are on fire now. A food crisis in many emerging economies seems to be a reality as both warring nations are major producer of many food grains including wheat and vegetable oil. When the world is staring at a slowdown, corporate earnings are most likely to be adversely affected. Such phenomenon is likely to create pressure on technology spend on enterprises in the coming quarters.

Especially, Europe is a critical market for most technology companies after the US. The EU is already facing challenges in oil and gas supply from Russia. Though the hyperbole between the major powers has not translated to any major disruption so far, no body can anticipate the future given the heated atmosphere. Indian IT firms have said that they have not seen any delay in decision making so far in Europe. The management commentary also indicates that most of the technology spend these days are considered essential to run the company and not discretionary in nature. All large firms have said that double digit revenue growth in FY23 will be achieved. Given the pipeline of deals and rising share of Indian firms in global outsourcing market, this is possible. However, supply pressure in terms of talent is likely to continue. Also, inflationary environment will push up cost for these companies. So, margin fall is very much on the cards for Indian IT industry. Also, client specific issues may also crop up if there is significant slowdown in global economy. Investors, therefore, should tamper their expectations with regard to returns from IT stocks in 2022.