IT stocks extend losses with 1.3% further decline amid worries over growth prospects

In 2022, IT stocks have largely underperformed the broader Indian stock market on fears that a recession in the US will trigger a slowdown in revenue growth and deal wins for Indian outsourcing majors

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Indian information technology stocks stayed in the red for the second day today, down 1.3 percent, as concerns over growth stayed on. The shares had lost over 3 percent on Wednesday after media reports of Goldman Sachs laying off employees fuelled worries over the prospect of the sector.

News agency Reuters reported that the US investment banking giant was looking to trim its headcount as soon as this month amid mounting risk of recession in the US. Goldman’s resumption of the annual practice after a two-year pause raised concerns that other major US banks may follow suit, which could also mean cost cuts in segments such as tech services.

The concerns around recession heightened on Tuesday as the August inflation print in the US showed that price rise continues to dog the US central bank, which is raising interest rates at the fastest pace in over four decades.

Technology stocks in the US were sold off on Tuesday after inflation in August came in at 8.3 percent, much faster than economists’ expectations of 8.1 percent. The August inflation print has reignited fears that the US Federal Reserve will continue to raise interest rates at a faster pace, which may eventually trigger a recession in the US economy.

In 2022, IT stocks have largely underperformed the broader Indian stock market on fears that a recession in the US will trigger a slowdown in revenue growth and deal wins for Indian outsourcing majors. The IT index has fallen 28 percent so far this year as against nearly 4 percent gains for the Nifty 50.

The US accounts for more than 25-65 percent of revenues for most Indian information technology companies. A slowdown in growth of the US economy will likely push clients to cut back on spending on IT services or delay the completion of ongoing projects.

IT stocks had recently found some favour with investors after the commentary from their managements that they have not seen any slowdown in deal wins or cut back on spending by clients.

With the US Federal Reserve now feared to raise interest rates beyond the 4 percent mark, participants are likely expect a recession in the US in the first half of 2023.

“While the PE de-rating was led by macro risk on growth (FY24), earnings cuts were driven by margin cuts as lead-lag between growth and operating structure normalise,” said brokerage firm HDFC Securities in a note.

At 10:21 am, the Nifty IT index was down 1.1 percent at 27,823 points with individual constituents like Infosys, Tata Consultancy Services, Wipro and HCL Technologies and Tech Mahindra falling 0.2-2 percent.

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