Why IT stocks falling? TCS, Wipro, Tech Mahindra available at 30% to 50% discount - Should you buy?

IT Stocks To Buy: IT stocks are under pressure despite the Rupee depreciating against Dollar. Usually, IT stocks and Rupee are inversely proportionate. To make it simple, when the Rupee falls, IT stocks rise as companies' prospects of earnings increase since they earn in Dollars for services they provide outside the country. During the Covid-induced lockdowns, IT stocks boomed, credit rapid adoption of internet-based services.

Giants like Tata Consultancy Services (TCS), Infosys, Wipro, Tech Mahindra and MindTree are available at 30 to 50 per cent discount with the Nifty Information Technology index falling 32% so far since its 52-week high. TCS, Wipro and HCL Tech hit fresh lows on Friday. TCS, the largest software exporter in the country, kicked off the earnings season in the first week of July by reporting a net profit of Rs 9,478 crore for Q1, which fell short of estimates. TCS settled below Rs 3,000 apiece on Friday, falling around 28% from its 52-week high of Rs 4,043 in January this year.

Wipro and HCL Tech have decreased by almost 35 per cent each while Infosys is trading 26 per cent lower. Tech Mahindra is available almost at a 50% discount. L&T Technology, Mphasis and Persistent Systems are also available at cheap rates. But what factors are contributing to this fall and how long this fall will persist? 

IT companies are witnessing a fall in the stock market mostly because of supply-side pressures, fall in demand amid macro headwinds in the western nations which include factors like interest rates that cause a decline in profits, revenue or sales and growth, high attrition, and steep valuations of international currencies, especially US Dollar and Euro, as well as, selling by foreign institutional investors (FIIs).

US recession on the anvil?

Another key reason for the decline in IT stocks is the possibility that the United States (US) and European markets might head into a recession amid fears of higher interest rates due to the Ukraine-Russia war.

According to Rachit Chawla, CEO Finway FSC, the US market has more than 50 per cent exposure and contributes a lion's share of revenues for the Indian tech companies.

"The pressure on the IT stock might persist in the foreseeable future because of the unstable financial markets and the worsening economic conditions in major global economies. The IT companies will need a marginal price hike during the new contracts within a year and a half to bounce back to winning terms," he said.

What investors should do?

Tanushree Banerjee, co-head of research at Equitymaster, said that the demand scenario of the sector is massive and many IT companies in the country have even recorded their balance sheets in black.

"While IT companies are likely to face some margin pressures due to cross currency headwinds in the near term, vendor consolidation and captive monetization efforts will help gain market share," Banerjee said.

The outlook for the long term remains good with deal pipelines remaining strong. Investors with long-term horizon should consider adding to their exposure to fundamentally sound tech stocks amidst the market volatility as and when their valuations look attractive.