Rise and fall in the performance of IT Sector

BSE IT index is down by almost 20 per cent year to date

BSE IT index is down by almost 20 per cent year to date (YTD) and is now in the bear zone. This fall has come after a rise of 243 per cent since the start of 2020. After the pandemic, IT sector remained one of the best performing indices. This was primarily on the back of significant earnings upgrades, especially for mid-tier IT companies. This led to rerating of the sector and price to earnings reached from the lower 20s to 30s. 

Nonetheless, in the last few months, we saw that the return potential from shares of IT companies are diminishing as compared to previous financial year (FY22). This is because of headwinds faced by the sector such as an increase in the cost of capital and geopolitical risk premium. There are also inflationary factors that is not acting in favour of the sector and the lead-lag cycle of cost and pricing. This has led to fall in the PE’s of sector as a whole and top companies are also witnessing the same. 

For longer-term fundamental drivers for the sector remain intact, such as better demand from developed markets, continuity of multi-year technology pivot across industries, and institutionalisation of operational efficiencies. Lead indicators also remain robust for the sector as hiring activity of last twelve months is better than FY18-21and deal trends (>USD 60bn TCV booking in last 12 months by Top-8 Indian IT adding growth visibility). 

Short term may be challenging for the sector, however, long terms growth drivers remain intact.