The BSE IT index, a gauge of the listed software companies, fell nearly 13% in February. The last time stocks lost this much was in the pandemic era. The index fell in double-digits only five times in the last fifteen years and February makes one of them.
This slump could come as a surprise as there were bullish expectations of a recovery, mainly on the back of improving macro conditions and clients spending. IT companies faced a turbulence over a 1-2 year period as clients cut back spending due to weakening demand.
IT stocks rely heavily on the global macro conditions to be steady as they derive a significant part of their revenue from the US and other western clients. Any potential threats to geopolitical stability, tariff wars in this case, will lead to worries over a slowdown.
This time, US President Donald Trump’s announcement of a 25% tariff on imports from Canada and Mexico, effective March 4, along with proposed tariffs on China, has heightened fears of a global trade war.
This uncertainty has adversely affected investor sentiment worldwide, analysts say. Market sentiments, especially the IT pack, have also been dampened as investors weighed the impact of Nvidia’s guidance on the broader technology landscape.Additionally, the recent volatility in Nasdaq tech stocks has added to the cautious sentiment, leading to increased selling pressure in domestic IT counters.Since the market peak in late September, foreign investors have withdrawn approximately $25 billion from Indian equities, with $4.1 billion in February alone.
“Concerns over high valuations and a weakening economy have prompted this significant capital flight,” said Puneet Singhania, Director at Master Trust Group.
There are also worries that some of the companies, who were building at least 25 or 26 large orders coming from AI, could be in for disappointment.
“So, the capex which was likely to happen in the US, that is coming under question and that is why we are seeing this kind of problems in the US and Nasdaq. So, I am saying it is too early to say, but definitely there is a question mark about the big capex which is likely to happen and subsequently the orders out of it. So, there has to be some caution as far as Indian IT is concerned,” said Nischal Maheshwari, a market expert.
Earnings
In the recent third quarter, the IT companies presented a mixed picture in a seasonally weak quarter, with a median revenue growth of
1.8% quarter-on-quarter (QoQ) in constant currency terms.
Motilal Oswal said guidance upgrades by major companies were disappointing and that revenue expectations for FY26/FY27 have been pared back across the Street.
“However, the commentary in some pockets turned incrementally positive. We believe the tech spending recovery, which was previously driven primarily by BFSI over the past six months, is now expanding into other verticals such as HiTech and Retail,” the brokerage said.
This quarter, deal win trends indicate a gradual rebound in shorter-term deals, signaling a return of discretionary spending by clients and setting the stage for an improved revenue conversion.
Motilal believes the cycle is gradually turning (might not be a J-curve recovery) as clients are beginning to reinvest their savings from cost-reduction programs to reduce technological debt.
What should investors do?
Analysts say IT’s dependence on the global markets means that stocks in the near term will move more towards what happens in the US and other western countries. How currencies behave and other things will also weigh. “Obviously when the entire market is down, then people sometimes, they are always looking at your IT services,” Amnish Aggarwal of Prabhudas Lilladher said a few days ago.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
