Summary of this article
Nifty IT index slumped amid disappointing global macroeconomic data.
OpenAI’s DeployCo venture threatens traditional Indian IT outsourcing revenues.
US inflation data reignited fears of high interest rates.
The Nifty IT index extended losses on May 13 as it slumped nearly 1 per cent to an intraday low of 28,015.15. Shares of Indian IT companies continued to witness a decline for the third straight session amid disappointing global macroeconomic data and shifting investor sentiment.
Shares of LTM fell the most, trading at Rs 4,081.30 apiece on the NSE, down by 1.51 per cent. On the other hand, IT heavyweights also dragged the index lower as shares of Tata Consultancy Services, Infosys, and Tech Mahindra traded lower by 0.69 per cent, 0.59 per cent and 0.57 per cent, respectively, on the NSE. Shares of Wipro and Coforge also traded lower by 0.4 per cent and 0.05 per cent on the NSE.
Why Did Nifty IT Extend Losses?
Shares of Indian IT companies came under pressure on May 12 as OpenAI announced the formation of a venture called "DeployCo", which is aimed at helping enterprises integrate and scale AI into their real-world operations. The formation of such a venture is expected to create significant pressure for major Indian IT firms, which provide services like "deployment and integration". Notably, this is the first major move by OpenAI to enter the IT services sector.
Sumit Pokharna, VP Fundamental Research of Kotak Securities, told Outlook Money that weakening investor sentiment and revenue visibility for Indian IT services led to the index extending losses.
“Concerns around the revenue visibility for the Indian IT services company due to multiple headwinds, like the launch of new AI models, and growth headwinds amid high competitive intensity. Markets fear AI may reduce traditional IT outsourcing revenues,” Pokharna said.
On May 13, the market continued to factor in the threat along with other factors, such as the release of U.S. headline inflation data for April. The headline inflation for the US was 3.8 per cent, which in turn reignited fears of a "higher-for-longer" interest rate environment. Indian IT firms derive a significant part of their revenue from the U.S.; thus, any delay in US Fed rate cuts is likely to dampen the outlook for client tech spending and discretionary projects.
Another major factor was a weakening in investor sentiment, as investors sold technology shares amid likely profit-booking. The tech-heavy Nasdaq also faced pressure as Treasury yields rose in response to the inflation data. The rise in a global "risk-off" sentiment tends to hit Indian IT stocks first due to their high correlation with U.S. tech indices.
Selling pressure from Foreign Institutional Investors (FIIs) also created headwinds for IT stocks, making them extend the losing streak. On May 12, FIIs offloaded shares worth nearly Rs 2,000 crore.
Concerns around the revenue visibility for the Indian IT services company are due to multiple headwinds, like the launch of new AI models, and growth headwinds amid high competitive intensity. Markets fear AI may reduce traditional IT outsourcing revenues.
What Should Investors Do Amid the Decline in IT Stocks?
Pokharna added that, with meaningful corrections in IT stocks, investors can consider buying opportunities in the sector. However, he cautioned investors that certain stocks continue to remain expensive; thus, investors should avoid stocks of companies which lack revenue visibility.
“With the meaningful correction in the stock prices, we believe a few pockets have become attractive for long-term investors. However, a few stocks are still expensive. Investors can avoid stocks that lack revenue visibility and can look outside the sector for diversification,” Pokharna said.
Pokharna advised investors considering buying the dip in IT stocks to diversify their buying across market capitalisations instead of focusing on opportunities in a specific market capitalisation.
“Don’t put all your eggs in one basket. It’s better to diversify your portfolio,” Pokharna said.
At the time of writing, the Nifty IT index traded lower by 0.78 per cent at 28,014.85 as Nifty IT heavyweights continued to face selling pressure, with Infosys, Tech Mahindra, and Tata Consultancy Services shares trading lower by as much as 1.09 per cent on the NSE.
