After a weak Q4, India's top IT services companies lose traction on bourses

Industry weighting in Nifty50 declines to 15.7%; lowest since Q2FY21

After leading the market rally for nearly two years since the outbreak of the Covid-19 pandemic in 2020, India’s top IT services companies — such as Tata Consultancy Services (TCS), Infosys, Wipro, HCL Tech, and Tech Mahindra — have lost sheen in April.
 
The combined market capitalisation of the big five IT companies that are part of Nifty50 index has declined nearly 10 per cent so far in April, against just 1.3 per cent decline in the benchmark during the period.
 
The big five closed Thursday with a combined market capitalisation of Rs 26.84 trillion, down from Rs 29.72 trillion at the end of March, and the record high of Rs 31 trillion at the end of December. In comparison, the Nifty50 index closed on Thursday at 17,245, down marginally from 17,465 at the end of March.
 
This is the first major decline in the share prices and market capitalisation of IT firms after seven consecutive quarters of growth. (See adjoining chart)

This sparked a decline in the IT industry’s weighting in the Nifty50 to 15.65 per cent from 16.2 per cent at the end of March. This is its lowest level since the September 2020 quarter. The industry weighting had reached a record high of 18.05 per cent at the end of December 2021.  
The decline has been led by Infosys, Tech Mahindra, and Wipro, in that order. Infosys’ market capitalisation has declined 17 per cent month-to-date from Rs 8.02 trillion to Rs 6.67 trillion on Thursday.  Tech Mahindra has lost 15.3 per cent of its market cap, while Wipro is down 11.7 per cent during the period.
 
Industry leader TCS, on the other hand, has fared better, seeing a lower 5.2 per cent decline in its market capitalisation this month. It ended Thursday’s session with a market capitalisation of Rs 13.11 trillion, against Rs 13.83 trillion at the end of March. HCL Technologies has also done relatively better with only 6.1 per cent decline in its market cap during the month.
 
Interestingly, Infosys has rallied the most in the last two years, seeing a 194 per cent jump in its market cap between March 2020 and March 2022, followed by Wipro (189 per cent), and Tech Mahindra and HCL Tech (167 per cent each). TCS was a relative underperformer with 102 per cent rise in its market cap during the period.
 
Analysts attribute the decline in the IT companies’ market cap to a combination of high valuations and a lower-than-expected earnings growth in Q4FY22. “IT companies’ valuation ratios such as price-to-earnings multiples were at a record high before Q4FY22 earnings. This triggered a sell-off when fourth quarter earnings turned out to be lower than expected due to decline in margins,” says Shailendra Kumar, chief investment officer at Narnolia Securities.
 
A poor show in Q4FY22 has prompted analysts to cut forward earnings estimates for FY23 for these companies. For example, Infosys FY23 expected earnings per share has been cut by 5-10 per cent by various brokerages, while that of HCL Tech has been cut 3 per cent.
 
However, Kumar says the share price decline is temporary and IT companies will regain their place at the head of the rally. “The industry’s volume growth and order book remains robust and will translate into strong revenue growth in FY23. It will translate into good earnings growth despite margins pressure.”
 
Others say the IT industry’s valuation premium over the broader market is now back to historical levels, limiting the downside risk. “After the recent correction, the IT stocks’ valuation premium over Nifty50 is backed to 2014 levels. That will now limit any underperformance over the broader market,” says Dhananjay Sinha, managing director and chief strategist at JM Financial Institutional Equity.
 
According to him, the IT industry will also gain from a continued appreciation in the US dollar and depreciation in the Indian rupee against major currencies.