On Credit Suisse warning of 10-27% fall, IT stocks tumble

HCLTECH shares decline most at 6.5 per cent after downbeat revenue forecast

Shares of information technology (IT) companies fell sharply on Friday after brokerage firm Credit Suisse warned of a 10-27 per cent valuation-led correction in these stocks amid macroeconomic headwinds in the US.

The Nifty IT index declined 3.1 per cent on Friday, its biggest decline since September 16, when it fell 3.7 per cent, with frontline stocks such as HCLTECH, Mphasis, Tech Mahindra, and Infosys slipping between 3 per cent and 7 per cent.

Valuations of Indian IT firms, the brokerage and research house argued, were trading at a large premium to historical trend, despite material correction from the top.

Credit Suisse’s analysis of six large correction cycles of the Indian IT sector suggested that barring a huge sudden macroeconomic event such as the global financial crisis (GFC) and Covid-19 pandemic, stock correction is driven mainly by valuation and not earnings per share (EPS).

IT valuations, it said, were stretched by every measure and that would drive a correction in these stocks if the US macroeconomic scenario weakens.

“They (IT stocks) trade at 34 per cent premium to one-year pre-covid average, unlike 11 per cent premium for Nifty and singledigit premium for S&P 500 and S&P IT. The top 4 Indian IT names could see large valuation correction as macro in the US weakens. We see HCLTECH at high risk of over 20 per cent valuation correction, around 15 per cent for Infosys and Wipro, and 8 per cent for TCS,” Credit Suisse said.

The brokerage remains bullish on Infosys, which is its only ‘outperformer’rated stock in the sector because of its superior growth prospects, and the possibility of catching up with TCS on valuation.

That said, most IT stocks back home have been underperformers thus far in calendar year 2022 (CY22).

The Nifty IT index has tumbled nearly 25 per cent in CY22. In comparison, the Nifty50 index has risen around 7 per cent during this period, ACE Equity data showed.

Credit Suisse was not alone in cautioning against valuations. Earlier, analysts at Nomura, too, had raised concerns about the rich valuations of some Indian IT companies amid fears of a recession.

It said the pain was likely to be more pronounced for companies dealing with interest rate-sensitive sectors like mortgage, capital markets, discretionary retail, and manufacturing.

In the very near term, furloughs are likely to weigh on the sector’s growth in the third quarter of financial year 2022-23 (FY23), Nomura said in a recent note, and it expects

US dollar revenue growth to slow down from 12.7 per cent in FY23 to 8 per cent in FY24 for companies under its coverage.

HCLTECH

Shares of HCLTECH tumbled 6.5 per cent to ~1,037 apiece, after the company said it expected revenue in financial year 2022-23 (FY23) to come in near the lower end of the guidance band.

At its investor meeting in New York, the management said this was because of higher-than-expected furloughs in BFSI and Hi-tech segments.