IT stocks slip on weaker growth prospects, Grexit

Information technology (IT) sector stocks shed about two per cent on Monday, due to the weaker growth forecast of Tech Mahindra and worries on a Greek default.

TechM slipped as much as 10 per cent on Monday, before closing the day 7.2 per cent down at Rs 484.35 on the BSE exchange. The IT sector index was down 1.7 per cent. Indian IT stocks were also down because of concern that a Greek payment default could spiral into a contagion and adversely affect Indian companies in the segment with business interests in Europe.

“The markets are disappointed that TechM has revised its guidance down and is expecting almost flattish growth this quarter. Most IT stocks have all corrected a bit and we expect some more decline in the short term,” said Rikesh Parikh, vice-president (equities), Motilal Oswal Securities.

HCL Technologies also fell sharply, pulling down the IT index. It was down 2.8 per cent.  Among the mid-cap segment stocks, Persistent Systems, Polaris and Mindtree were down 5.3, 3.3 and 2.8 per cent, respectively.

Also, HCL and TechM have huge business exposure to the European region. Reports suggest Greece is likely to default on its payment to the European Union, due on Tuesday, resulting in a possible exit from the latter.

Analysts said stocks with exposure to the region would continue to outperform the equity markets for some time to come. Large-cap stocks are expected to fare better than mid-cap counterparts.

“We see more value in large-cap IT stocks than the mid-cap stocks at this moment because of better growth prospects in the large-cap names. We expect to see demand for IT companies among businesses improving in the coming quarters,” said Dipen Shah, head of PCG Research, Kotak Securities. “In such a scenario, large-cap companies will be the first beneficiaries of this improvement in sentiment.”

On Monday, the benchmark BSE Sensex and NSE Nifty indices were down about 0.6 and 0.8 per cent, respectively, taking cues from global markets, nervous about the situation unfolding in Europe. Tata Consultancy Services remained flat; other large-caps Infosys and Wipro were down 1.6 and 1.2 per cent during the day.

IT stocks are expected to trade within five to 10 per cent in the short term as uncertainty over Greece continues. “We will also wait for the commentary that will follow the corporate earnings announcement from next month. If growth outlook remains as optimistic as the Street expects, these stocks could start to see an up-move from these levels,” said Parikh.