Weak Infy forecast spooks tech stocks

Biggest day's fall in 8 months, after projection of weaker growth than earlier estimated for March quarter

Shares of information technology (IT) companies tumbled on Thursday, in their highest single plunge in a day since August last year. They were led by bigwig Infosys, which projected weaker revenue growth in January-March.

Infosys shares fell nine per cent, as investors trimmed  exposure to the stock after the company, in a investor meet on Wednesday, said revenue growth in 2014-15 would be impacted if the March quarter failed to meet earlier expectations. The shares closed at Rs 3,357.50 on Thursday, down 8.5 per cent over Wednesday. The fall was the highest in a day since Chairman Narayana Murthy took charge in June. The CNX IT index fell 4.2 per cent. “The disclosure by the Infosys management had a rub-off effect on the other stocks in the IT pack,” said Gaurav Dua, head of research, Sharekhan.

The fresh set of forecasts prompted brokerages to cut price targets and ratings for Infosys. Barclays, which had organised the investor meet, cut its price target by five per cent to Rs 3,960. CIMB cut its price target to Rs 4,000 from Rs 4150, while Ambit reiterated a ‘sell’ rating on the stock. “We reiterate Infosys’ medium-term growth challenges from ongoing senior management and sales staff churns and margin challenges,” it had said in a recent research note.

IT stocks have been the favourites on Dalal Street for nine months, as the weaker rupee and improving outlook for the US boosted investor appetite. The CNX IT index has gained 52 per cent since May last year; the benchmark NSE Nifty gained eight per cent in that time. Software companies derive a major part of their business from the US.

Analysts said these stocks were vulnerable to disappointments, as most institutions such as mutual funds and insurance companies were over-exposed to these. “People were over-bought in these sectors because it had seen a sharp-run and has given spectacular returns. So, investors are now re-aligning their portfolios to accommodate stocks of other sectors,” said Rikesh Parikh, vice-president (equities), Motilal Oswal Securities.

Analysts also say these stocks could be under pressure in the run-up to the elections, as stocks of capital goods, financial and infrastructure stocks take centre-stage. But the best is far from over for these stocks, they added.

With the US and European economies continuing on their recovery paths, technology companies like Infosys, Tata Consultancy Services, HCL Technologies and Tech Mahindra, among others, are likely to thrive in the robust demand environment.

“Infosys has stopped being the bellwether stock for the sector for the past two years. It is a special case, as the company has been undergoing some management change. It has been re-aligning its strategies and is taking time to adjust to it,” said Swapnil Pawar, chief investment officer, Karvy Capital.

Fund managers recommend buying Infosys at lower levels. “At every dip, investors should consider buying into this sector, as these companies have always delivered within or above market expectations,” said Pawar.