Devalued rupee breathing new life into IT stocks. Will this happiness last?

IT has been the worst performer so far in 2022, with the Nifty IT index losing around 31% of its value while Nifty lost 2% over the period. However, as the Nifty fell around 1.8% of its value on Monday, the index was the only glimmer of hope in a red sea.

Analysts have warned that an economic slowdown and a looming recession in the US and Europe will hit Indian software exporters’ margins hard. But the sharp devaluation of the rupee is now acting as a tailwind for the sector.

IT majors like TCS, Infosys, HCL Technologies, Wipro, Tech Mahindra and Mindtree, which derive much of their revenue in dollars, are likely to benefit from a weaker rupee. The national currency hit a record low of 81.65 against the safe-haven dollar on Monday.

Analysts believe that the price is mainly affecting the global recession and IT stocks are now trading at reasonable valuations.

Year-to-date (YTD) Wipro, Coforge and Tech Mahindra are down around 42-45%. TCS has lost around 20% of its market value, while Infosys and HCL have lost 27% and 31%, respectively.

Hiren Ved, CEO of Alchemy Capital Management, said IT stocks underperformed on fears of lower technology spending due to the recession in developed markets like the US and EU. “As long as the multi-year cycle of increased outsourcing and spending for specialized IT service companies remains intact, we will continue to invest in IT,” he said. However, the current momentum in IT stocks could prove to be short-lived. lived for those who enter the sector to make a quick buck, even if the long-term growth story remains intact.

IIFL Securities CEO Sandeep Bhardwaj said a slowdown or recession would adversely affect India’s exports as demand for goods and services would slacken. “As such, we should expect higher volatility in IT stocks over the medium term,” he said.

Global brokerage firm Jefferies has said that Accenture’s quarterly revenue growth of 22% yoy indicates strong growth for Indian IT companies in the second quarter. “Its FY23 organic growth forecast of 5.5-8.5%y/y falls short of our 14%/8%y/y growth expectation for Indian IT companies for FY23/24E, which puts our estimates at risk for the fiscal year 24 could represent. With sector valuations still at a 10% premium to 10-year average levels, we remain selective, with Infosys being our only pick in the sector,” it said.

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