Infosys woes spark selloff in stocks of tech firms

Infosys investors were left poorer by ₹54,305 crore on Monday after the stock plummeted to a 52-week low of ₹1,185.30. It recovered from there to close 9.4% down at ₹1,258.2, the sharpest fall in three years. The result came a day after India’s largest software exporter Tata Consultancy Services (TCS) missed Street estimates on revenue and profit. Infosys forecast FY24 sales to grow 4-7%, disappointing investors.

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Apart from Infosys, Wipro also hit a fresh 52-week low at ₹352.

Bears have ramped up short positions across the active futures contracts of the five large-cap IT stocks—TCS, Infosys, HCL Technologies, Tech Mahindra and Wipro—after hammering Infosys on Monday. Apart from Infosys and TCS, heavy short build-up was seen in HCL Tech, which will announce its March quarter earnings on Thursday, and in Tech Mahindra, which will report its quarterly numbers on 27 April.

The bearish bets were evident from the open interest (OI)—outstanding buy-sell positions—rising alongside the price correction. A rise in OI accompanied by price correction signals bearish sentiment. For instance, HCL Tech’s OI rose 24.75% as the contract fell 2.5%. Tech Mahindra, which fell 5%, saw OI jump 10.8%.

While many analysts remain bullish on the long-term prospects for the tech giants, they expect the pain in the IT sector to last for another couple of quarters as clients in the US and Europe defer discretionary spending while reprioritizing non-discretionary spending.

“While Q4 results are disappointing, we view it and the lower FY24 guidance as a manifestation of the overall weak macros, which might keep Infosys – and other IT stocks – under pressure in the near term,” said Vibhor Singhal, director and lead – IT services, Nuvama Research. “The pain could last for a quarter or two, maybe, after which we expect enterprises to ramp up digitization and cloudification, which would translate into improved commentary, improved deal flows and intoned topline. We advise buying the stock at current levels with a one-year price target of ₹1,610,” he said.

Other brokers like Motilal Oswal Financial Services, while re-iterating a buy on Infosys, have cut the one-year price target by 13% to ₹1,520 from ₹1,750.

“The problem is when the growth and guidance are increased, analysts tend to re-rate the valuation (price-earnings multiple), and when earnings and guidance disappoint, there is a P/e derating,” said Siddharth Khemka, research head (retail), Motilal Oswal Financial Services.

The Infosys price-to-earnings (PE) ratio, which stood at over 27 times one-year forward earnings in December 2021, currently stands at 19.2 times. The PE was 18 times during October 2020, leaving room for more correction, according to Khemka.

Andrew Holland, chief executive of Avendus Capital Public Markets Alternate Strategies, said he didn’t expect to witness outflows from IT and into banks in a “big way.” He added that the fate of IT companies would become clearer once the US Fed begins to cut interest rates as markets could interpret that as a sign of growth taking precedence over inflation.