The Nifty IT index fell 0.79% on Monday, 12 October, as Tech Mahindra, TCS, and Oracle shares fell up to 3%. Experts remain cautious about the sector due to macro challenges and AI uncertainty. Pankaj Pandey said, "I believe IT is still not a sector to buy due to too much uncertainty."
After clocking a stellar gain of 3% in the previous session, the Nifty IT index resumed its downward march on Monday, 12 October, falling 0.79%, while the index components such as Tech Mahindra (down 2.85%), TCS (down 1.44%), and Oracle Financial Services Software (down 1.43%), fell up to 3%.
LTM (down 1.26%), Coforge (down 1.14%), Wipro (down 0.47%), and Infosys (down 0.33%) also ended lower on Monday.
HCL Technologies (up 0.52%) and Persistent Systems (up 0.29%) were the only two stocks out of the total 10 in the index that ended higher.
Reeling under pressure
The IT index has been under pressure for a long time due to concerns ranging from macroeconomic challenges, regulatory headwinds in the US, the AI-led disruption in the sector, and foreign capital outflow.
Over the last five years, the IT index has delivered a negative return of 16% compared to a 22% jump in equity benchmark Nifty 50.
Year-to-date, the IT pack is down 25% compared to a 14% fall in Nifty.
Stocks such as Wipro (down 39.5%), Infosys (down 37%), TCS (down 34%), and HCL Technologies (down 25%) have lost heavily this year.
Shares of Tech Mahindra (down 8.50%) and Persistent Systems (down 8%) are also down, while those of Oracle Financial Services Software (up 35%) and Coforge (up 11.5%) have bucked the trend this year.
Is it the right time to buy IT stocks?
Experts appear cautious about the sector and advise waiting till the time demand scenario improves and more clarity emerges on how AI is going to shape the industry.
Pankaj Pandey, the head of research at ICICI Securities, believes it is not the right time to buy IT stocks.
"I believe IT is still not a sector to buy due to too much uncertainty related to the macro challenges, AI, and other factors," said Pandey.
Sumit Pokharna, SVP- Fundamental Research at Kotak Neo, has similar views.
Pokharna underscored that the IT sector's valuations have corrected significantly, and many concerns related to AI and revenue growth appear to be priced in, making valuations attractive at this point. However, investors need to be stock-specific as challenges galore.
"Geopolitical uncertainties, rising inflation and higher US bond yields are creating pressure. Revenue visibility remains weak, and order books are not growing as expected. Some companies also appear to lack clarity on how to navigate the AI transition. Their management teams have yet to clearly articulate their AI strategies and how their businesses will evolve. Clients, too, are uncertain about their spending decisions amid the current geopolitical environment," Pokharna observed.
"A significant portion of technology spending is being directed towards AI, leaving a smaller share of budgets for traditional IT services. As a result, client decision-making is getting delayed. The revenue model is also changing: contracts are increasingly focused on deliverables rather than manpower or hourly billing," Pokharna added.
Besides, institutional investors are exiting the sector, contributing to the ongoing pressure on IT stocks.
Pokharna suggests investors can consider stock-specific bets, but the sector as a whole is not a clear buy at this stage. He has buy recommendations on Coforge and Persistent Systems from the sector.
"Buying IT stocks indiscriminately is unlikely to work until there is greater clarity on the sector’s outlook. Companies such as Coforge and Persistent Systems appear relatively well-positioned because of their strong execution capabilities. They are more agile than some of the larger IT companies," said Pokharna.