IT stocks in bear grip: Is it good time to buy tech stocks for higher return - Experts speak

IT Stocks To Buy, IT Stocks NSE, Recession 2022 News: The Indian IT (Information Technology) stocks are reeling under extreme pressure due to volatility amid weak global cues. The Nifty IT index traded positive on Friday in an upbeat market a day after slipping 5.74 per cent on account of slump in the tech-heavy stock index Nasdaq and foreign brokerage firm JP Morgan downgrading the sector.

JP Morgan said that it sees 'peak revenue growth behind us' as it downgraded the outlook of the sector to ‘underweight’. The firm said that IT's earnings that were accelerating till the third quarter of FY22 are now slowing down. It will likely worsen further, affecting the revenues.

The Indian IT stocks that are facing the heat and top companies that have seen an erosion in their prices are TCS, Wipro, HCL Technologies, L&T Technology Services, Infosys, Mphasis, Persistent Systems, and Tech Mahindra.

Rachit Chawla, Founder & CEO, of Finway FSC, said IT companies are witnessing supply-side pressures, a fall in demand amid macro headwinds in the western nations (which include factors like interest rates that cause a decline in profits, revenue or sales, and growth), high attrition, steep valuations as well as selling by FIIs.

Recession imminent in US?

Another important reason for the decline in value of the IT stocks is the possibility that the United States (US) and European markets might head into a recession due to soaring energy prices and prospects of higher interest rates resulting due to the Ukraine-Russia war. The US market has more than 50 percent exposure and contributes 40-78 percent of revenues for the Indian tech companies.

"There might be a general consensus that investors are willing to invest on digitalization despite the financial conditions and industry position; however, there is a growing volatility due to inflationary headwinds and weakening global economy, which might result in reducing discretion in investments," he said.

But there are some silver linings too. "Due to the Ukraine-Russia war, there has been depreciation in rupee and it is good for the IT stocks by improving the margin as the IT companies mostly earn their revenue in dollars," he said.

Should investors buy IT stocks on dips?

The IT stocks have given exemplary returns during the pandemic period but are under selling pressure. While there is market uncertainty in the present times, for long-term investors, IT stocks can prove valuable. To secure profit, investors’ interests should shift towards value stocks that are trading low now.

Rachit said that the demand environment of the sector is massive and many IT companies in the country have even reported no slowdown. Maintaining the pipeline for digital transformation, and deals will make the sector grow stronger in the future.

Rachit said that the IT sector might underperform in the short and medium-term, but will perform well in the long term, adding that IT companies will need a few price hikes during the new contracts within a year and a half to bounce back to winning terms.

Manoj Dalmia, founder and director at Proficient Equities, said that the NIFTY IT index could achieve levels of 27,510 in the coming days that is more selling is expected. "This can be a good opportunity to accumulate some quality stocks as they might be available at a good discount."

"We can see IT index has given breakdown of classical head and shoulder pattern. So still it looks weak... There is still 10 to 15% pain left. But on dips, long-term investors can start stock SIP," Ravi Singhal, Vice Chairman, GCL Securities, said.