IT index hits 4-month low; analysts cautious

Since September 30, Nifty IT index was down 9.5% against 1.6% fall in the Nifty 50.

Information technology (IT) companies’ shares came under pressure again on Wednesday, with the NSE (National Stock Exchange) Nifty IT index hitting its four-month low on concerns over weaker-than-usual revenue growth for the firms on account of lower working days in the December quarter.

Also adding to concerns over the past few sessions is the H-1B visa issue in the US. Most of the frontline IT stocks – Tata Consultancy Services (TCS), Infosys, HCL Technologies and Tech Mahindra – lost one per cent to four per cent on the NSE.

“Surprisingly, the commentary of most of the players for December 2015 quarter indicates weaker than-usual revenue growth on account of lower working days (3.5 per cent, according to Cognizant) and higher than expected furloughs, that too in some new verticals – BFSI for instance – unlike the trend in the past when it used to be restricted to retail and manufacturing,” points out Girish Pai, head of equity research at Nirmal Bang Institutional Equities in a report.

Visa issue

A new bill (Grassley-Durbin bill) introduced in the US Senate in the second week of November seeks to limit large IT companies from applying for H-1B visas if more than 50 per cent of their workers are already on H-1B or L-1B visas.

The voices for suspension of the visa are growing stronger with Ted Cruz, a leading Republican candidate recently calling for 180-day suspension to complete a comprehensive investigation and audit of pervasive allegations of abuse of the program, reports suggest.

Among individual stocks, Infosys was the top loser on Wednesday, down four per cent at Rs 1,020, and extended its previous day’s two per cent fall on the NSE.

“There has been a correction in IT stocks since the results were announced in the September quarter. It does appear that the market is aligning with the cautious guidance that IT companies gave out post the results. The margin expansion that one would have expected for the large-cap IT companies has also not really happened,” said Dhananjay Sinha, head of institutional research at Emkay Global Financial Services.

“Going forward, one will have to be selective regarding these stocks and look at companies that will benefit from better discretionary spending in bigger economies such as the US, and whether they are able to retain pricing power or not. We expect the rupee to weaken, which remains a supportive variable as far as IT stocks are concerned. Besides the cyclicality of the business cycle and the cautious guidance, the H-1B visa issue that has cropped up again since the past few days has also dampened sentiment,” he adds.

Pai of Nirmal Bang has a ‘buy’ rating on HCL Technologies, ‘accumulate’ rating on Infosys, and ‘sell’ rating on TCS, Wipro, Tech Mahindra, and Persistent Systems.