Concerns about H1B visas, sluggish global IT investment, and uncertainty around AI have caused Indian IT stocks to plummet precipitously, raising questions about whether it is time to buy the dip or exercise caution.
Due to issues with AI, H1B visas, and US companies’ declining discretionary spending, the domestic information and technology pack has seen a steep decline from its December 2024 highs. But should we wait before expanding our exposure, or is it the time to start cherry-picking for beaten-down blue-chips?
What has caused the decline in IT stocks?
For Indian IT companies that mostly depend on onsite staff in the US, the recent increase in H1B visa fees in the US has sparked worries about operational expenses. Additionally, this undermines investor confidence by generating fears of future greater protectionist actions.
Additionally, because of ongoing macroeconomic uncertainty, international clients—mainly in important markets like the U.S. and Europe—are becoming more cautious about their technology spending. Customers anticipate that discretionary expenditure will not improve much, if at all, and may even worsen in certain sectors.
The prognosis for local IT players is becoming even more apprehensive as a result of companies worldwide concentrating on cost-optimization programs and implementing layoffs.
Consequently, the Nifty IT index has entered a steep correction, plunging more than 27% from its 52-week peak. After more than four years of consolidation, the Nifty IT index is already returned to its August 2021 trading price, according to DSP’s Netra analysis.
Losses are recorded in IT stocks
All index components have fallen more than 10 percent each, while blue-chip companies like TCS have had losses of more than 30 percent. Since its October 2018 top, TCS has produced a 4% price CAGR and has dropped to levels last seen in October 2020, according to DSP.
Additionally, the sector’s earnings-growth estimates are coming down quickly. The deployment of AI is seriously affecting these companies’ prospects.
Modifications to analyst calls
Brokers remain wary of a number of IT companies: Wipro continues to get the lowest sentiment, with “sell” and “hold” recommendations climbing to 18 and 18, respectively. Concerns about margin constraints and demand recovery have prevented IT services stalwarts like Tech Mahindra and LTIMindtree from seeing many positive revisions over the last ten months.
Brokerage calls for IT players have changed
In general, experts seem to prefer a select few players. TCS and Infosys had the greatest “buy” recommendations and the fewest “sell” ratings during this time frame, while Mphasis has received the most favorable revisions.
Do values make sense?
IT company shares are getting close to their long-term average prices, but DSP thinks profits growth is still lacking. “Growth visibility is low and negative news is frequent during the worst of the economic cycle. Investors may look for deals during these periods,” the research said.
The IT industry is approaching typical values
It would become a deal if the Nifty IT Index dropped by another 15% or more. For the time being, it offers a desirable, although relative, method of increasing equity exposure via tranches.
According to a statement from local brokerage YES Securities, Indian IT has been seeing substantially falling margins since FY14. Since cost-takeout and vendor consolidation dominate deal activity and conventional levers like utilization, subcontracting, and outsourcing are virtually exhausted, the brokerage warned, there are no immediate catalysts for margin improvement.
In light of this, YES Securities thinks that the sharp decline in the Nifty IT from its top in December 2024 presents favorable entry possibilities. “Our top selections are businesses with substantial margin headroom like Tech Mahindra and pricing muscle like Infosys.”