Usually considered a haven, Information Technology (IT) stocks are under trading under pressure with sectoral gauge Nifty IT falling 2 percent so far this week. During the same period, the broader Nifty50 fell just over a percent.
The selling in IT stocks has come even as most market participants maintain a positive stance on the sector, while a few others have recommended against aggressive buying amid high volatility in the market.
Here are the main reasons for the recent selling in IT stocks:
Market participants believe valuations are a bit stretched in the IT sector and some even highlighted attrition as a concern for the sector which has put IT stocks under pressure lately.
Milind Kulkarni, CFO at Tech Mahindra, told CNBC-TV18 that users are willing to spend more and are accelerating their spending on IT. But he also pointed out that as far as hiring costs are concerned, they continue to rise and remain an industry-wide worry.
The overall trend for IT stocks is positive given the appreciation in the US dollar. To elaborate, IT companies bill clients in dollars so an appreciating dollar would augur well for them, said Bhavin Mehta, VP – Derivatives Strategist, Dolat Capital Market.
“Recent selling in IT stocks was partly due to long unwinding,” Mehta added.
“Investors unwound their long positions in IT stocks to protect mark-to-market hit on broad portfolio values after the sharp sell-off we saw this week,” he added.
Some analysts also said that the SEBI margin requirement rule which was to be implemented in December had also triggered a broad-based sell-off in the market. However, the implementation being deferred to February has given some respite to the market.
The market regulator has postponed the implementation of the 50 percent cash-margin rule for futures and options traders and credit-default swaps segment to February 28, 2022, from the earlier deadline of December 1, 2021.
If the Nifty IT index falls below 34,700 points then a further fall is expected, said Sneha Seth, derivatives analyst at Angel Broking.
Seth says this is the time to close long positions suggests exercising caution given the high volatility in the market at this point in time.
One could buy the dip but ‘aggressively buying’ IT stocks even at this juncture is not a prudent move.
What you could do with IT stocks:
Ajit Mishra, Vice-President of Research at Religare Broking, said that midcap IT stocks look slightly expensive.
Though, he added that the overall sector view remains positive. He says one could look at buying largecap stocks which offer some safety net in this highly volatile market environment.
Meanwhile, Atanuu Agarrwal, Co-founder of Upside AI said, “By historical standards, just like the broader market, IT stocks are trading at relatively high PE multiples. However, I believe that in the long term, there are strong tailwinds in the industry’s favour. Of course, there are challenges like high churn but this may turn out to be cyclical”.
At the moment, Upside AI has relatively high exposure to IT in its largecap and midcap portfolio.
“Largecap IT companies should continue to benefit from a secular digitisation trend, while having the wherewithal to withstand any short to mid-terms issues like high churn,” Agarrwal added.