Hard days for Indian software giants as foreign funds log out of IT stocks

With the apprehension of a slowdown in earnings deepening since three US banks came crashing down and the fear of a recession intensified, foreign investors began pulling out of top Indian IT companies.

Foreign investors reduced its stake in Infosys, India’s second largest software services firm, to 43.08 percent from 44.57 percent in the sixth straight quarter of divestment, according to latest shareholding pattern. FII holding in the country’s largest software exporter, Tata Consultancy Services, was down to 12.72 percent in the March quarter from 12.94 percent in the tenth consecutive quarter of sell-off.

Other IT companies such as Tata Elxsi Ltd, Tech Mahindra Ltd, Zensar Technologies, LTIMindtree, Mastek, Mphasis, L&T Technology Services Ltd, Birlasoft, and Affle India Ltd, too recorded a steady decline in FII stakes over the previous quarter. While the pull-out from tech Mahindra continued for nine quarters in a row, Affle India suffered the bleeding for seven quarters.

The divestment by foreign investors weighed heavy on the quarterly earnings of the country’s top IT companies with TCS, Infosys, Wipro, HCL Tech, and Tech Mahindra, reporting weak financials that fell short of market expectations. They also expressed a lack of confidence in the near-term outlook, leading to a significant decline in net additions for fiscal 2023. The slump could be attributed to the ongoing crisis in US regional and European banks, as well as an unfavorable macroeconomic environment.

The sell-off has been worst in the March quarter with foreign institutional investors (FIIs) withdrawing around Rs 7,978 crore from the information technology sector, according to NSDL data.

Wipro Ltd and HCL Technology, however, bucked the trend as they reported a spurt in foreign funds flow. After seven consecutive quarters of reducing their stake in Wipro, foreign investors returned to the company in the March quarter, raising their stake to 8.77 percent from 8.67 percent. For HCL Tech, the FII holding increased to 18.92 percent from 18.29 percent sequentially.

Global brokerage house BofA recently predicted that the earnings growth could be at risk due to the global economic slowdown, particularly affecting the IT sector. As a result, it has stated that IT remains its top underweight, indicating a negative outlook for the sector.

Brokerage house Citi has revised its preferred list and eliminated Infosys from it,  following its negative outlook on the IT sector. Consequently, the firm’s coverage has been downgraded to either sell or neutral in all areas. The brokerage house has marked IT services as underweight.