Infosys To Tech Mahindra: Why IT Stocks Are Falling?

Infosys down 8%.

Tech Mahindra and Mphasis plunge 7%.

IT behemoths Wipro and TCS fall 4%.

These were just the big IT names that plunged the most yesterday and dragged the BSE IT index lower 5%.

Smaller counterparts Mastek, Tata Elxsi, Coforge among others, all fell in the range of 2-4%.

Well, as yesterday's losses show, investors who have exposed themselves to IT stocks know it's not a bed of roses. Those who were thinking IT stocks like TCS and Infosys will continue to give good returns are having a reality check.

The euphoria surrounding IT stocks ever since TCS and Infosys reported results was clearly growing. It was one of the primary reasons why IT stocks have come under pressure of late.

When TCS reported results last week, several brokerages anticipated margins to decline led by supply-side pressures and decline in utilisation due to ramp-up in fresher hiring since the past few quarters. 

Both Infosys and TCS reported elevated attrition rates and it was a clear indicator that margins could come under pressure as manpower expenses rise.

Due to a decline in margins, TCS and Infosys have reported slower growth in profits compared to revenue growth.

Yesterday, shares of Infosys plunged over 9% intraday after the company posted its earnings. The fall was primarily because brokerage houses lowered margin estimates.

Motilal Oswal, ICICI Securities and Reliance Securities all lowered their estimates on slower growth and margin pressure. Jefferies and Nomura were also raised margin concerns. 

For the quarter under review, Infosys posted a 12% rise in its March quarter net profit at Rs 56.9 bn.

The firm's revenue growth at 1.2% sequentially in constant currency terms missed estimates, partly due to a one-off client-specific issue.

Infosys has guided for revenue growth of 13-15% YoY in constant currency for fiscal 2023, while it guided for an operating margin of 21-23%.

Thus India's second biggest IT firm saw its biggest fall today since 23 March 2020.

The recent results of TCS and Infosys suggest that the profit margins of IT majors will be affected and they won't necessarily enjoy the high margins of pandemic period.

Another reason why Indian IT stocks are falling is because the tech-heavy Nasdaq index is under pressure. This is because the US Fed is tightening its monetary policy to fight inflation. Indian IT companies are following suit.

The silver lining…

The past couple of months have been subdued for IT stocks. They failed to excite investors as the recovery seen during the start of pandemic was not visible now.

The Nifty IT index has fallen over 14% this year.

In this correction, mutual funds are loading up on quality IT stocks.

According to a leading financial daily, mutual funds bought mid and smallcap IT stocks such as Coforge, Oracle Financial Services, Persistent Systems, Cyient, among others over the last two months.

The depreciating rupee factor cannot be ruled out. The rupee has come under pressure due to Russia-Ukraine war and rising interest rates.

A sliding rupee is good for IT stocks as it improves their margin. IT companies earn their revenue in dollars. This translates to higher rupee earnings during times of dollar appreciation.

Equitymaster on IT stocks

We reached out to Brijesh Bhatia, Ace Chartist and Research Analyst at Equitymaster, on what he has to say about IT stocks.

Here's Brijesh:

The IT index has corrected over 10% in the last 8 trading sessions, and the biggest in today's session as Infosys opened and trades over 7% lower.

The recent fall is awful for bulls as the technical structure signs are of more correction on the cards, if 32,000 is taken out.

Technically, the structure defines the distribution as per the Wyckoff theory.

The recent fall if prolongs below the previous low of 32,400, it confirms the Sign of Weakness (SOW), and the previous swing high will be the Last Point of Selling (LPSY) as per theory.

It means the future bounce will be the short-on-rise setup for the IT index.

But there is something for the bulls too.

The 262 DMA (Daily Moving Average) acts as major support and resistance for the long-term trend and index is trading right around the average.

Additionally, the RSI is trending in an oversold territory.

Bulls need to protect the 32,000-32,400 support zone, else its will be the bears' year for the IT index.

As per Brijesh, it's do or die for the bulls on the IT index.

If you're interested in being part of Brijesh's charting journey as he shares how to create wealth from the profitable trade setup, join his telegram channel – Fast Profits Daily.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

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