Wipro, Tech Mahindra lead rout in IT stocks as recession risks loom
- Shares of Indian IT companies have been battered the most this year because of persisting macro concerns and fear of possible recession in the US.
- IT companies get a large share of their revenues from US clients.
- Wipro and Tech Mahindra were top losers with up to 40% fall in their stock price.
- The IT sector’s margins have been hit by multiple headwinds like high attrition and wage hikes.
AdvertisementFrontline information technology companies have been under pressure from the start of the fiscal year on macro economic concerns across global markets, especially in the US.
Moreover, a steep fall on August 29 added to the losses made during the year. The US Fed chief Jerome Powell’s speech on 26 August has further vitiated the outlook on the IT sector.
Not to forget, IT companies get a huge pie of their business from the US clients and many of the top technology companies have been showing signs of slowing revenues.
Azim Premji’s Wipro saw huge sell-off in its stocks followed by Tech Mahindra and HCL Technologies.
Source: NSE, as on August 29, 2022
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Powell at the Jackson Hole event on August 26 said that the cost of bringing down inflation in the country will “bring some pain to households and businesses” in the US. This directly impacts investor sentiment for companies that bank on the US for growth.
The IT sector is also among the poor performers on exchanges given tepid corporate earnings and fears of a possible recession in the US which will lead to a slowdown in the domestic IT majors.
“The Indian IT industry remains sensitive to the US and European markets, which together contributed around 86% to revenue in FY22,” said a report by CRISIL.
Rate hikes by the Federal Reserve, inflationary pressures and the evolving geopolitical developments could moderate revenue growth and are key monitorables, says the report.
Disappointing corporate earnings slows IT sector growth
Most top IT companies witnessed some slowdown in profits because of heightened employee cost pressures led by rising attrition rate. Largest IT firm TCS reported a modest 5% growth in profits in the year on year comparison and on a quarterly basis, it fell by 5% to ₹9,478 crore because of cost pressures in June quarter. The company said that it was a challenging quarter from a cost management perspective as it impacted their operating margin.
Adding to the woes, Infosys reported an almost 6% sequential decline in June quarter net profit on account of wage hikes. A fourth of Tech Mahindra’s first quarter revenues were eaten up by employee expenses, pushing its profits down by 25% on a sequential basis.
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