Why IT stocks are falling?

Why IT Stocks Are Falling? You Need To Know!

India’s favorite sector has fallen by 20% in a month. Last year the IT sector was the best performing sector in the country, so why IT stocks are falling?

India is the largest software exporter in the world. The IT sector accounted for 8% of the country’s total GDP. Availability of Low-cost labor and skilled manpower in the country are the two growth drivers for this sector.

Historically Nifty IT Index has performed exceedingly well.

Source: NSE Historical Performance of Nifty IT

The IT sector is the darling sector for Indian investors for ages. following are the reasons behind why stocks are falling I will also tell you what as an investor you can do?

1. Q1 results

Recent Q1 results of IT majors like TCS, HCL, and Mindtree disappointed investors. Due to that, IT stock is under a lot of pressure these days. The Revenues of all of these companies have increased but all of them struggle to show profit growth.

The reason for falling IT stock is their recent results. so, Here is a quick recap of Q1 results in case you missed it. 

TCS Q1 results:

The revenue grew by 16.2% YOY to Rs 52,758 crore. At the same time, the net profit increased by 5.21% YOY to RS 9,478crore. The attrition rate stood at 19.7%.

HCl Q1 results:

Revenue up by 16.9% to Rs 23,464 crore. The net profit increased by 2.4% YOY to 3,283crore. The attrition rate increased from 21.9% to 23.8%.

Mindtree Q1 results:

Revenue from operations increased by 32% YOY to 471.6 cr. While The profit after tax rose by 37.3% YOY. The attrition rate stood at 24%. for the first quarter. 

From the above results, we can see the revenue of the companies has increased year on year (YOY) but the catch is companies are struggling to report profit growth. The biggest reason here is the attrition rate which is the topic we will learn about in the next session in detail.

2. Attrition rate

The attrition rate is the rate of employees leaving the company. The lower the attrition rate better it is. If the attrition rate is higher then it shows a large number of employees are leaving the company.

The mass resignation of employees is a big concern for the company. To tackle the rising attrition rate companies are undertaking initiatives like increments in salaries of employees and performance-based incentives. It is directly impacting the profitability of the companies.

Attrition rate Is the reason for falling IT stocks. Although it is Expected to come moderate in the coming month

3. Fear of American recession

If the country’s GDP is negative for 2 consecutive quarters, then it is called a recession. The US has shown a GDP degrowth of 1.6% in the first quarter. If the US GDP negatively dropped one more quarter, then we can say the recession has arrived in America. But why the hell we should waste our time caring about the US recession. Well, the answer to this question is quite simple.

Indian IT companies have the majority of clients based in the US. So, when the US faces a recession then it will obviously impact the revenues of Indian IT companies.

 Big tech companies like Microsoft, Google, and Tesla are laying offing their employees which are pointing toward the American recession. While Indian giants like TCS and HCL have also slowed down their hiring process in the May-June quarter. Fear of the American recession is also a reason for Indian IT stocks falling.

 4. Performance of IT stocks in a year

IT index has declined 26% so far in 2022. 

Company Market Cap (in crore) YTD Returns
TCS 14,09,671 -21.46%
Infosys 7,12,779 -24.42%
Wipro 3,48,343 -45.25%
HCL 3,46,114 -33.42%
Tech Mahindra 1,34,268 – 45.37%
L&T Infotech 99,437 -47.27%
Mindtree 68,736 -41.63%
Mphasis 58,241 -37.41%

All of the above reasons have lessened the confidence of investors and hence IT stock price has fallen a lot.

Is it the right time to buy IT stocks?

In the falling market of IT stocks, Lots of experts suggest buying IT stocks at current levels as they are available at attractive valuations. Motilal Oswal sees large-cap IT stocks as attractive and they are buying them. Mid-cap stocks are overvalued so, one should stay away from them for a while.

5. Tips to buy in recession:

“Buy strength not weakness”- Shankar Sharma

As the IT stock is falling, A well-known and celebrated investor in India, Shankar Sharma advises investors not to buy stocks just because they have fallen a lot. Instead one should invest in the stocks that continue to outperform the market.

Buy the market leaders in times of recession. Because in the time of recession weak players will wipe out from the competition, while the market leaders will emerge stronger and get the market share of weaker players.  

Conclusion:

Experts believe that IT stocks have already fallen a lot so the recent results may not affect the share price of these stocks that much. The future of the Indian IT sector is bright, in the short-term stock might fall a bit but the long-term growth story of India is intact so is its IT sector.

1 thought on “Why IT Stocks Are Falling? You Need To Know!”

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