The information technology (IT) sector witnessed significant pressure as the Nifty IT index tumbled over 3% in Wednesday’s intra-day trade, hitting its lowest point in more than eight months. Concerns about a potential US recession by the end of the year and the ongoing tariff war under President Donald Trump have weighed heavily on investor sentiment, leading to widespread declines across IT stocks.
Brokerage Downgrades and Stock Movements
Investment sentiment took a further hit after Motilal Oswal Financial Services (MOFSL) downgraded major IT stocks. The brokerage firm downgraded Infosys to Neutral and Wipro to Sell, citing weak growth prospects and macroeconomic uncertainties.
- Wipro shares plummeted 6% to Rs 262.40
- Infosys shares declined 5% to Rs 1,580.10 on the National Stock Exchange (NSE)
- TCS, HCL, Tech Mahindra, and Persistent Systems also saw notable declines
MOFSL set target prices for these key IT firms:
- Infosys: Rs 1,650 per share
- Wipro: Rs 240 per share
- TCS: Rs 4,050 per share
Factors Driving the Decline
The domestic brokerage report highlighted several factors contributing to the IT sector’s underperformance:
- Lower probability of US rate cuts: The Federal Reserve’s stance on interest rates remains uncertain, making investors wary of IT sector growth prospects.
- Geopolitical tensions & trade risks: Tariff disputes and global instability have made enterprises adopt a “wait-and-watch” approach, delaying technology investments.
- Sluggish GenAI adoption impact: Although Generative AI (GenAI) adoption is increasing, it has yet to materialize into significant revenue growth for IT services firms.
- Shift in IT spending priorities: Clients are prioritizing capital expenditures (capex) over IT services, making FY26 discretionary spending highly uncertain.
- Valuation concerns: Large-cap IT services firms are trading at similar valuations, but historical trends suggest companies like Infosys and Wipro may struggle to maintain valuation parity with peers.
TCS Emerges as a Beneficiary?
While growth uncertainty persists, analysts believe that TCS is best positioned to withstand the current market downturn. Key factors supporting TCS include:
- Stock correction of 20% in the past six months, making it relatively undervalued compared to peers.
- Margin expansion opportunities, which could lead to stable earnings growth despite sluggish revenue.
- Historical valuation trends, which favor TCS over Infosys and Wipro in times of market stress.
Sector-Wide Impact and Performance
The Nifty IT index was the worst-performing sectoral index, declining 3.4% to 36,128.75. In contrast, the Nifty 50 saw a marginal decline of 0.24%, settling at 22,443.10.
The IT index touched an intra-day low of 36,050.95, marking its lowest point since June 28, 2024. Year-to-date, the Nifty IT index has plunged 17%, significantly underperforming the broader Nifty 50 index, which has declined only 5%.
Among the top IT losers:
- HCL Technologies, Persistent Systems, Mphasis, LTIMindtree, L&T Technology Services, Coforge, Tech Mahindra, and TCS all saw intra-day declines ranging from 2% to 4%.
IT Valuation Premiums Remain High
Despite recent corrections, the Nifty IT price-to-earnings (P/E) ratio remains at a 37% premium compared to the Nifty 50 P/E, which is above its five-year average (even accounting for the COVID-19 period highs). This suggests that while IT stocks have corrected, they are still relatively expensive compared to the broader market.
Conclusion
The IT sector continues to face significant headwinds, including macroeconomic concerns, geopolitical tensions, and cautious enterprise spending. While major IT firms like Wipro and Infosys have suffered downgrades, TCS appears to be relatively better positioned in the current market scenario. Investors should closely monitor upcoming US economic data and global market trends to assess potential opportunities and risks in the IT sector moving forward.
