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Why are IT Stocks Falling?

On Friday, March 22nd, a notable downturn hit major Indian IT corporations, leading to a significant dip in the Nifty IT sector. The sector kicked off the day with a 2% drop, plummeting to a low of 34,700, before closing at 35,188 - down 838 points or 2.33%. L&T MindTree and Infosys faced the steepest declines, each dropping by nearly 3%, followed by WIPRO, HCL Tech, and TCS, all of which saw their stock prices fall by over 2%. But the question is - what led to sell-offs in these stocks? And what lies ahead? Let’s decode this mystery

India’s IT Sector - Overview

Over the years, the Indian IT sector has evolved itself from being a secondary contributor to becoming the primary contributor in India’s GDP. The IT & BPM sector is a significant economic driver in India, contributing 7.4% of the country's GDP in FY22 and is projected to reach 10% by 2025, significantly impacting the nation's GDP and welfare.

While the future for the tech-led companies looks shiny, there are certain things to take into consideration before taking a step to invest in these stocks. The NIFTY IT index has corrected more than 5% in just the last 1 month. The correction in the sector is attributed to the stagnant rise in the revenue source and the pause in the demand. Recently, tech-giant Accenture revised its full-year revenue growth in a range between 1-3% for the next year, which is a drastic 50% drop against the previously expected revenue growth of up to 5%. But why did Accenture lower its expectations?

Accenture Saga-

On Thursday, US-based professional services company - Accenture released its fourth quarter earnings for FY23. In its quarterly reports - the company displayed marginal growth of 4-5% on a Y-o-Y basis. The company’s consulting business avenue, however, reported revenues of $8.20 billion, declining 2% against consulting revenues for the fourth quarter in FY22. In its report, the tech-led company also drew a picture of its expectations from the upcoming year, where it revealed expectations for stable foreign exchange impacts and a moderate revenue growth. According to the global professional services company, the foreign-exchange impact on its financial results, measured in U.S. dollars, is anticipated to remain unchanged compared to the fiscal year 2023. This stability in currency exchange rates is a significant factor for a multinational corporation like Accenture, which operates across various global markets. Looking ahead to fiscal 2024, Accenture has set its revenue growth targets in the range of 2% to 5% in local currency terms. This forecast reflects the company's cautious optimism amidst a complex global economic landscape.

Following these announcements, the company stock dropped more than 9% closing 35 points down from its previous close. It is noteworthy that the next year guidance provided by Accenture has brought turbulence across the global IT sector, spreading cautious vibes all over.

The Ripple Effect on Indian IT Firms -

The landscape of India's IT sector is shaped by leading entities such as TCS, Infosys, Wipro, Tech Mahindra, HCL Technologies, alongside a spectrum of medium and small-scale companies. A significant portion of the revenue for these firms is sourced from international markets, predominantly the United States and Europe. This external dependency renders the sector particularly vulnerable to fluctuations in global economic conditions.

Recent trends have shown a decline in business growth for Indian IT companies, largely influenced by a combination of macroeconomic challenges and geopolitical uncertainties. These factors have led to a more conservative approach towards technology investments among global clients, resulting in prolonged negotiations and delayed agreement finalizations. And Accenture’s next year guidance has provided a visual confirmation on the same.

The slowdown in Western economies has particularly impacted technology firms reliant on software service exports. With the majority of their revenue stemming from North America and Europe—accounting for approximately 57 to 58% of total income—Indian IT companies have faced subdued business activity over recent quarters. This downturn is a direct consequence of the cautious spending behavior observed among clients in these regions, further compounded by the broader economic challenges they face.

The convergence of factors leading to the recent downturn in Indian IT stocks underscores the intricate linkages between the global IT market dynamics and the Indian IT sector's fortunes. As explained, the sector's significant dependence on revenue from the United States and Europe makes it inherently susceptible to economic tremors in these regions. Accenture's revised revenue projections have acted as an indicator, mirroring the broader challenges faced by the IT industry worldwide, including stalling demand and cautious capital expenditure on technology amidst uncertain economic conditions. This cautionary stance from one of the industry's leaders has not only led to a reassessment of growth prospects for the sector but also highlighted the sensitivity of Indian IT firms to shifts in global market sentiment. The resulting sell-offs in major Indian IT stocks can be seen as a direct response to growing apprehensions about a potential slowdown in tech spending by major economies, especially the US.

In essence, the challenges facing the Indian IT sector are multifaceted, stemming from both internal market dynamics and external global pressures. The recent decline in stock values is a reflection of the sector's current vulnerability to international market fluctuations and a reminder of the need for Indian IT companies to diversify their revenue streams, enhance their service offerings, and innovate in response to changing global market demands. As the sector navigates through these turbulent times, its ability to adapt and evolve will be crucial in overcoming the challenges posed by the depressive trends in the US IT market and securing a resilient path forward.