IT stocks slump as Credit Suisse warns of further growth pain

Shares of information technology (IT) companies came under selling pressure today after Credit Suisse Securities India warned of further correction in valuations.

The brokerage firm said that the current valuations of major Indian IT companies was unsustainable in the light of worsening economic outlook for their biggest market, the US.

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The US economy is widely expected to tip into a recession in the second half of 2023 owing to the US Federal Reserve's aggressive tightening of the monetary policy to reign in multi-decade high inflation in the country.

The US Federal Reserve has raised interest rates by over 350 basis points since March while at the same time shrinking the bond assets on its balance sheet, also known as quantitative tightening,

A recession in the US economy is broadly considered negative for India’s IT sector, which derives roughly 45-60 percent of its revenues from the world’s largest economy. A shrinking US economy will force clients of Indian IT companies to scale back their technology-related spending.

Earlier this week, Amazon Web Service’s clients indicated that they are looking at cutting their expenditure on cloud computing and related services in light of the gloomy outlook for the US economy.

Credit Suisse said that while it sees high risk of cuts to revenue growth estimates for Indian IT companies, it does not expect it to fully translate into downgrades for earnings per share estimate for such companies.

Credit Suisse believes that significant tailwinds on operating profits, including lower wage hikes, rationalisation of wages as well as the rupee’s depreciation should provide cushion to overall earnings of major Indian IT companies.

At 9:52am, the Nifty IT index was down 1.2 percent at 29,757 points with shares of HCL Technologies, Persistent Systems, Infosys, Tech Mahindra and Tata Consultancy Services falling 0.4-5.1 percent.Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.