The Indian IT stocks have been falling since January despite rupee valuation dropping against the US Dollar. IT companies' major earning is coming from Exports and their revenue in Dollar. So IT companies could benefit from rupee depreciation that occurs whenever the Dollar is getting stronger which translates in Indian rupee that IT Exporters will earn higher revenue.
The Nifty It index came off from the peak of 39,000. It is sliding almost 18 percent into an industry most likely going to enter the bear market.
However, IT stocks are falling due to US recession fears. Recently, the Fed chairman Powel admitted that recession is inevitable and is tightening its policy rates. Many IT industry analysts warned that, which industry spending will contract in the coming years, that is about 6-8 percent.
Another reason is the Nasdaq index is under pressure, further India”s major IT companies rely on US/EURO region projects.
Those stocks are unable to produce better results like after the pandemic rebound. Now those stocks' profit margins are severely under pressure. This is why the higher rate of attrition in last year accelerated its manpower costs. Typically, IT services are Employee intensive sectors, exodus of higher talented and technicalities that they had to increase employers benefits. That causes soaring operating expenditure that resulted in lower profit. Their profit growth is low compared to its revenue growth.
On the flip side. India is likely to be a big gainer due to cost optimization drive across Globe in a surging inflation and spiraling down growth rate that developed nations slow down is limited impact on the Indian BPO services.
Stocks” Valuation
Indian IT Stocks average PE of 28, which compared to past 10 years average PE was 18, which is overvalued, furthermore Banking & Financial services are key clients of the Indian IT industry that are affected by increasing interest rates. This situation could continue in the next two years. Those negative impacts are not fully captured yet because IT stocks are late market cycle stocks and the effects will be realized a few quarters later. Some credit agencies downgraded this industry.
Generally, Non cyclical sectors would not be affected by economic downturn but this time is a different situation. Therefore, we could not expect immediate rebound in IT stocks.
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