Nifty IT slips 2%; macro concerns weigh on Indian tech stocks

Rising concerns due to weakening of global macroeconomic conditions amid geopolitical turmoil have weighed on IT stocks. Note that Indian IT companies get a large part of their revenues from the US and Europe

Shares of Indian IT services providers Infosys Ltd., HCL Technologies Ltd., Wipro Ltd., L&T Infotech, Mpahsis Ltd., and Coforge Ltd, among others, were under pressure on Tuesday, falling 2.0-2.5% each on the National Stock Exchange in opening deals. As a result, Nifty IT saw a similar decline.

Rising concerns due to weakening of global macroeconomic conditions amid geopolitical turmoil have weighed on IT stocks. Note that Indian IT companies get a large part of their revenues from the US and Europe. Delayed client spending does not bode well for deal pipeline and therefore revenue growth visibility of IT companies.

According to analysts at Motilal Oswal Financial Services Ltd, retail, which is the second largest vertical for Indian IT services companies, is facing strong headwinds. "Major retailers are reporting slow revenue growth, which will affect IT spends. To add fuel to the fire, profits for these large retailers are taking a hit on account of inflation," it said in a report on 22 August.

The retail industry contributes make up for 15% of total revenues of large caps Tata Consultancy Services and Infosys each. For midcaps, Mindtree Ltd and LTI, this vertical forms 23.6% and 10.3%, respectively of their overall revenue mix.

Apart from that, the manufacturing vertical is also facing challenges - semiconductor shortages, non-availability of key raw materials (from China), labor, supply-chain disruptions, and inflation in raw material prices are key headwinds for the sector, noted the Motilal Oswal report.

While long-term IT spends remain intact due to strong demand for these products, there may be some near-term impact due to a delayed recovery in supply, it cautioned.

In Q1FY23, IT companies saw steep margin compression due to wage hikes, increased travel costs and subcontracting expenses. Attrition level also remained elevated for most IT companies. So far in this calendar year, the Nifty IT index has declined 26% underperforming benchmark Nifty50 which is down about 1%. Following this decline, valuations of IT stock have softened.

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